University of Michigan Law School
University of Michigan Law School Scholarship Repository
Articles
Faculty Scholarship
2009
Securities Law and the New Deal Justices
Adam C. Pritchard
University of Michigan Law School, [email protected]
Robert B. Thompson
Vanderbilt University Law School
Follow this and additional works at: http://repository.law.umich.edu/articles
Part of the Administrative Law Commons, Courts Commons, Legislation Commons, Securities
Law Commons, and the Supreme Court of the United States Commons
Recommended Citation
Pritchard, Adam C. "Securities Law and the New Deal Justices." R. B. Thompson, co-author. Va. L. Rev. 95, no. 4 (2009): 841-926.
This Article is brought to you for free and open access by the Faculty Scholarship at University of Michigan Law School Scholarship Repository. It has
been accepted for inclusion in Articles by an authorized administrator of University of Michigan Law School Scholarship Repository. For more
information, please contact [email protected].
SECURITIES LAW AND THE NEW DEAL JUSTICES
A. C. Pritchard & Robert B. Thompson•
INTRODUCTION··················································································· 842
l. SOCIAL CONTROL OVER FINANCE .............................................. 846
A. The Securities Laws of the New Deal .................................... 846
B. The Securities Act .................................................................... 849
C. The Securities Exchange Act of 1934 .................................... 858
D. The Public Utility Holding Company Act of 1935 ............... 862
E. The Chandler Act of 1938 ...................................................... 868
F. Summing Up ............................................................................ 872
II. THE TRIUMPH OF THE ADMINISTRATIVE STATE ...................... 872
A. Delaying the Judicial Resolution of the Initial Challenges
to the Securities Laws .............................................................. 873
1. Jones v. SEC: The SEC as "Star Chamber" .................... 875
2. PUHCA 's Opening Act: Finding a Test Case .................. 880
3. Litigating the Chosen Case: Electric Bond & Share ....... 881
B. The New Deal Justices on the Court ...................................... 883
1. U.S. Realty and the Emergence of the Roosevelt Court. 883
2. Anticlimactic Triumph: North American v. SEC ........... 890
III. TENSION AMIDST TRIUMPH ........................................................ 892
A. The Rule of Experts vs. Judicial Review ............................... 894
IV. A RELIABLE COURT ............ ························································ 912
A. Reliability ................................................................................. 913
B. The Ephemeral Leaders as to Securities Law ....................... 917
1. Douglas ................................................................................ 917
2. Frankfurter .......................................................................... 921
3. Into the Void ....................................................................... 923
CONCLUSION········································································· ....... ······· 925
•Frances and George Skestos Professor of Law, University of Michigan and New
York Alumni Chancellor's Chair in Law, Vanderbilt University, respectively. We are
grateful to Bill Bratton, Lisa Bressman, Victor Brudney, Barry Cushman, Rich
Friedman, Eugene Gressman, Nina Mendelson, Reuel Schiller, David Skeel, Kevin
Stack, and Joel Seligman for helpful comments and criticisms of earlier drafts of the
article. Pritchard acknowledges the support of the Cook Fund of the University of
Michigan Law School.
841
842
Virginia Law Review
[Vol. 95:841
INTRODUCTION
F
RANKLIN Delano Roosevelt ("FDR") fueled his 1932 presidential campaign with populist attacks against the moneyed interests, particularly investment bankers and the New York Stock
Exchange. 1 In the wake of the stock market crash of October 1929
and the depression which followed, the public sought someone to
blame for the nation's economic misery. Anxious to oblige, the
Senate pointed the finger at Wall Street's financiers in its 1932 Pecora investigations. 2
The fight for social control over finance would be one of the
great political battlegrounds of the New Deal and the eight men
picked by Roosevelt for the Supreme Court were in the thick of it. 3
The two most prominent examples are Felix Frankfurter, a trusted
advisor to Roosevelt, and William 0. Douglas, the third chairman
of the Securities and Exchange Commission. Frankfurter's involvement in the securities laws was pervasive: he helped "select
the draftsmen of the SEC's three basic statutes, the FTC officials
who enforced the Securities Act during its first year, most of the
original SEC commissioners, and many of the Commission's top
staff appointees." 4 Moreover, he prodded Roosevelt to take on the
public utility industry and brokered a key legislative compromise
enabling the passage of the Public Utility Holding Company Act of
1935 ("PUHCA"), which Joel Seligman has characterized as "the
most radical reform measure of the Roosevelt administration. "5
1
Joel Seligman, The Transformation of Wall Street 19-20 (3d ed. 2003).
Id. at 1-2. The Pecora hearings take their name from Ferdinand Pecora, who led
the Senate investigation. Pecora would later serve as one of the Security and Exchange Commission's first commissioners.
3
Roosevelt named eight new Justices during his presidency and also elevated Stone
to Chief Justice. Because James Byrnes resigned after serving only a short time on the
Court, Roosevelt thus filled eight of the nine seats. Only Roberts (and Stone) carried
over from the pre-New Deal Court to Truman's presidency.
•Seligman, supra note 1, at 57-58.
i Id. at 122; see also Morris L. Porer, A Postscript to the Administration of the Public Utility Holding Company Act: The Hydro-Electric System Case, 45 Va. L. Rev.
1007, 1007--08 (1959) ("Probably the most dynamic piece of New Deal legislation,
[PUHCA) was revolutionary in that it required not only the immediate eradication of
specific and now all too familiar abuses, but also in that it provided for the minute supervision of actions and programs then conceived as being safely reposed in management. This statute aimed not only at the remedial, but, shooting at the escaping present, had also as its target a better economic future." (footnote omitted)).
2
2009]
Securities Law and the New Deal Justices
843
The future Justice with the greatest hands-on experience with the
securities laws was William 0. Douglas. His research on the bankruptcy reorganization process led to the enactment of the Chandler
Act, which gave the SEC a critical role in the reorganization of insolvent public companies. As SEC Chairman, he took on the New
York Stock Exchange, thereby making himself a national political
figure. 6 Douglas also began the breakup of the public utility holding companies under PUHCA. But those two Justices do not begin
to exhaust the securities law experience of those who would be
called upon to interpret these acts. In the Senate, future Justices
Hugo Black and James Byrnes played critical roles in the legislative process leading to the enactment of the securities laws. In a
smaller way, Wiley Rutledge joined in the public debate. Future
Justices Robert Jackson and Stanley Reed were key players in defending those laws against constitutional challenge in the courts;
Frank Murphy's tenure as Attorney General thrust him into the
litigation as well.
In this Article, we explore the role of the New Deal Justices in
enacting, defending, and interpreting the federal securities laws.'
Although we canvass most of the Court's securities law decisions
from 1935 to 1955, we focus in particular on PUHCA, an act now
lost to history for securities practitioners and scholars. 8 At the time
of the New Deal, PUHCA was the key point of engagement for defining the judicial view toward New Deal securities legislation.
Taming the power of Wall Street required not just the concurrence
of the legislative branch, but also the Supreme Court, a body that
the Roosevelt Administration generally considered hostile to its
economic planning initiatives. PUHCA was enacted at a time when
the constitutional scope of federal power was still very much in
doubt. The statute was a major federal intervention into the free
•Seligman characterizes Douglas's chairmanship as "the most accomplished in the
SEC's history." Seligman, supra note l, at 157.
7
For this project, we examined the papers of each of the eight New Deal Justices in
the Library of Congress and in various other libraries where they are deposited. The
records relied upon are all publicly available.
8
PUHCA was repealed in 2005. Energy Policy Act of 2005, Pub. L. 109-58, 119 Stat.
594. We end our analysis when the last of the PUHCA reorganizations had worked
their way up to the Court in the mid-1950s. Among the New Deal Justices, Justice
Frankfurter would continue to serve into the 1960s and Justices Black and Douglas
into the 1970s. We leave those periods for future work.
844
Virginia Law Review
[Vol. 95:841
play of capitalist forces, requiring the dismantling of the utility
holding companies. Thus, it stood in contrast to the other federal
securities laws, which focused primarily on disclosure. At the time,
PUHCA was much more important than the Exchange Act in
regulating corporate finance, and more dramatic even than the
Sarbanes-Oxley Act of recent vintage. 9 PUHCA "gave the SEC
power to refashion the structure and the business practices of an
entire industry. Except in wartime, the federal government never
before had assumed such total control over any industry." 10
PUHCA provided the majority of securities cases in the Supreme
Court over the first twenty years after the enactment of the securities laws, 11 but PUHCA's significance to the Court's docket was not
merely quantitative. The Court's decisions on PUHCA were the
most closely followed securities cases in the popular press, as they
pitted the giant utility holding companies against the government
in a battle for survival.
The Supreme Court's ten-year journey toward affirming that
PUHCA was within the scope of Congress' commerce power reflects the shift in the Court's balance of power toward Roosevelt's
appointees. The New Deal Justices shared a belief in the promise
of the administrative state to tame private interest; they blamed the
excesses of private ordering for the Great Depression. By 1947, the
9
Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 (codified at 15 U.S.C.
§§ 7201-66 (2006)).
10
Seligman, supra note 1, at 131.
"PUHCA accounted for thirteen cases between 1935 and 1955, as compared to ten
for all other securities law issues combined. The PUHCA cases were: SEC v. Drexel
& Co., 348 U.S. 341 (1955); Gen. Protective Comm. for Holders of Options Warrants
of United Corp. v. SEC, 346 U.S. 521 (1954); Niagara Hudson Power Co. v. Leventritt,
340 U.S. 336 (1951); SEC v. Cent.-lll. Sec. Corp., 338 U.S. 96 (1949); In re Elec. Power
& Light Corp., 337 U.S. 903 (1948); Eng'rs Pub. Serv. Co. v. SEC, 332 U.S. 788 (1947);
SEC v. Chenery Corp. (Chenery Corp. 11), 332 U.S. 194 (1947); Am. Power & Light
Co. v. SEC (Am. Power & Light Co. JI), 329 U.S. 90 (1946); N. Am. Co. v. SEC, 327
U.S. 686 (1946); Am. Power & Light Co. v. SEC, 325 U.S. 385 (1945); Otis & Co. v.
SEC, 323 U.S. 624 (1945); SEC v. Chenery Corp., 318 U.S. 80 (1943); Landis v. N. Am.
Co., 299 U.S. 248 (1936).
The ten non-PUHCA cases were: Wilko v. Swan, 346 U.S. 427 (1953); SEC v. Ralston Purina Co., 346 U.S. 119 (1953); Penfield Co. of Cal. v. SEC, 330 U.S. 585 (1947);
SEC v. W. J. Howey Co., 328 U.S. 293 (1946); SEC v. C. M. Joiner Leasing Corp., 320
U.S. 344 (1943); Edwards v. United States, 312 U.S. 473 (1941); A. C. Frost & Co. v.
Coeur D'Alene Mines Corp., 312 U.S. 38 (1941); Deckert v. Independence Shares
Corp., 311 U.S. 282 (1940); SEC v. U.S. Realty & Improvement Co., 310 U.S. 434
(1940); Jones v. SEC, 298 U.S. 1 (1936).
2009]
Securities Law and the New Deal Justices
845
New Deal Court had established the power that the federal government now wields over corporate and securities regulation. Of
equal import, the Court's decisions in PUHCA cases established a
pattern of expansive interpretations of the securities laws; government regulation and the SEC enjoyed a remarkable string of victories beginning in 1940, a winning streak that would last, with minor
exceptions, until 1973.12
PUHCA also provided the key vehicle for working out the judicial response to the inherent tension between administrative discretion and judicial review. Roosevelt's appointees to the Court all
believed government power was needed to tame the excesses of
business, but they split over the respective roles of courts and the
SEC in implementing this vision. Would the new administrative
state, built with the assistance of the future New Deal Justices, afford discretion to the experts, or would the SEC be bound by legal
rules defined by judges?
Frankfurter's answer to this question put him in the minority on
the New Deal Court. Although Frankfurter was a long time believer in governance by experts, 13 as a Justice he regularly sought to
constrain the SEC with rules and even common law understandings
of particular words. The Court majority, however, was willing to
defer broadly to the expert agency. Douglas's views on this ques-
12
The Supreme Court gave an expansive view of the securities law and supported
the SEC's position in all but a few of the securities decisions that came before the
court in the first four decades after the passage of the securities act. See E. Thomas
Sullivan & Robert B. Thompson, The Supreme Court and Private Law: The Vanishing Importance of Securities and Antitrust, 53 Emory L.J. 1571, 1579-86 (2004) (describing the Supreme Court's expansive holding in all but a handful of securities cases
until 1973). Lewis F. Powell played the key role in reversing this trend. See A.C.
Pritchard, Justice Lewis F. Powell, Jr., and the Counterrevolution in the Federal Securities Laws, 52 Duke L.J. 841 (2003).
13
After FDR's election as Governor, Frankfurter
sent F.D.R. a copy of the Dodge Lectures he had delivered at the Yale Law
School, The Public and Its Government, which emphasized many key ideas of
his mature political philosophy-the indispensability of the administrative
process in the management of contemporary economic life; the importance of
nurturing federalism and seeking state or regional solutions to social problems
that were not overwhelmingly national in scope; the adaptability of the Constitution to the resolution of these conflicts; and the crucial role that could be
played in modern government by trained experts recruited from the nation's
universities and professional schools.
Michael E. Parrish, Felix Frankfurter and His Times: The Reform Years 200 (1982).
846
Virginia Law Review
[Vol. 95:841
tion closely aligned him with the majority of his colleagues, but his
influence was no greater than Frankfurter's in the field of securities
law. The former SEC chairman's uncharacteristically cautious pattern of recusing himself in cases involving the agency meant that he
rarely participated in securities cases. Somewhat unexpectedly, the
two Justices whose pre-Court experience might have suggested
they would most dramatically influence the Supreme Court's securities jurisprudence ended up with surprisingly little effect on the
development of that doctrine.
We proceed as follows. Part I describes the role of the future
New Deal Justices in helping to enact the federal securities laws.
Part II sets forth the constitutional challenges that followed and
the role played by Roosevelt's appointees, first in defending the securities laws and subsequently upholding them as members of the
Court. Part III shows the tension that arose among the New Deal
Justices over the conflict between judicial review and the rule of
experts. Part IV explores Roosevelt's success in establishing a
Court majority that gave a reliably warm reception to the SEC. We
also offer some speculations on Frankfurter and Douglas's lack of
influence as Justices in the field of securities law. We sum up in a
brief Conclusion.
I. SOCIAL CONTROL OVER FINANCE
A. The Securities Laws of the New Deal
The fight for social control over finance was one of the great political battlegrounds of the New Deal. Most of FDR's future Supreme Court nominees would distinguish themselves in the combat. The years from 1933 to 1935 saw annual fights to enact the
three laws that established the foundation of federal securities legislation; four more laws were enacted during Roosevelt's second
term:
• The Securities Act of 1933 ("Securities Act") brought the
federal government into the regulation of the public offering of securities, curbing the investment bankers' prior
domination of that process. The law required corporate
issuers to make full disclosure when selling securities in
an effort to curb the speculative excesses of the 1920s.
Securities Law and the New Deal Justices
2009]
847
•
The Securities Exchange Act of 1934 ("Exchange Act')
targeted the New York Stock Exchange, regulating trading practices and requiring disclosure of operations and
results by companies listing on exchanges. The Exchange
Act also created the Securities and Exchange Commission to administer the securities laws.
• The most controversial of the three securities laws from
FDR's first term, however, was the Public Utility Holding
Company Act of 1935, which targeted the holding companies that owned most of the public utilities in the
United States at the time. PUHCA went well beyond disclosure that characterized the two earlier securities statutes and permitted the SEC to break up the pyramid
structure of those holding companies and shape the corporate governance and capital structures of the reorganized firms. PUHCA's sweeping reforms would trigger a
decade-long war in the courts, as the giant utilities resisted the efforts of the SEC to dismantle them.
• During FDR's second term, the Chandler Act rewrote
the bankruptcy law to give the SEC a similar role in corporate reorganizations. 14
We do not provide a comprehensive account of the legislative history behind these statutes, but instead highlight the role of the future Justices in the political fight to pass these laws. 15 The future
Justice closest to the center of the conflict was Felix Frankfurter.
While serving as a Harvard professor, he had ingratiated himself to
Roosevelt as a legal and economic advisor during Roosevelt's tenure as governor of New York. Frankfurter and the many proteges
he sent to Washington to man the Roosevelt administration were
disciples of Louis Brandeis's crusade against "bigness," that is, economic concentration. 16 Frankfurter and his fellow Brandeisians
14
The other three statutes of the second term-the Trust Indenture Act of 1939, 53
Stat. 1149; the Investment Advisers Act of 1940, 54 Stat. 847; and the Investment
Company Act of 1940, 54 Stat. 789-completed the menu of New Deal securities legislation, extending government regulation to bond covenants, mutual funds, and investment advisers. These statutes produced no Supreme Court cases during our period of study.
1
' For the comprehensive account, see Seligman, supra note 1.
16
William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal 148 (1963)
("Brandeis' ideas made their way in Washington under the aegis of his chief disciple,
848
Virginia Law Review
[Vol. 95:841
viewed big business as an enemy to be defeated. 11 Imposing government control over the world of finance was not merely a matter
of sound policy, but the key front in the battle to save capitalism
from the evil of the capitalists. 18 Frankfurter wrote to Justice
Harlan Fiske Stone in early 1933: "I wish I had a tithe of
Macauley's power and of Bagehot's financial capacity. I would
write a series of studies entitled 'Enemies of Capitalism,' and instead of dealing with Marx, Lenin & Co., I should analyze the
Charles W. Mitchells, the Samuel lnsulls & Co .... " 19 Frankfurter
Felix Frankfurter, and through the young men Frankfurter had sent down to be law
clerks to the Justice or to staff New Deal agencies."). Brandeis's influence was not
limited to his writings before becoming a Justice; he regularly sent messages on policy
to Roosevelt, using Frankfurter as his emissary. Peter H. Irons, The New Deal Lawyers 20 (1982). Brandeis's use of Frankfurter for this task was a long-standing practice. See David W. Levy & Bruce Allen Murphy, Preserving the Progressive Spirit in a
Conservative Time: The Joint Reform Efforts of Justice Brandeis and Professor
Frankfurter, 1916-1933, 78 Mich. L. Rev. 1252, 1257, 1279 (1980).
17
H.N. Hirsch, The Enigma of Felix Frankfurter 104 (1981) ("The ideological core
of Brandeisian liberalism was its emphasis on smallness. As many of the advisors of
Roosevelt's first New Deal-Tugwell, Berle, Moley-struggled to create a planned
and centralized economy, the Brandeisians sought to restore the simple and decentralized market economy of the nineteenth century. Their key program was trust busting-breaking up the large banks, the large corporations, the large utility companies.
To the first New Dealers, business was to be a partner; to the Brandeisians, business
was the enemy.").
18
Frankfurter wrote Roosevelt that "the real tr0uble with capitalism is the capitalists." Letter from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin D. Roosevelt (May 18, 1934) (on file with the Felix Frankfurter Collection, Library
of Congress, Reel 60).
Frankfurter had a similarly dim view of the lawyers and accountants who served the
capitalists. See Letter from Felix Frankfurter, Professor, Harvard Law Sch., to James
M. Landis, Comm'r, Fed. Trade Comm'n (Feb. 8, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 70) ("I have Jong had strong suspicions
that these fancy accounting firms occupy a role towards financial and business immoralities comparable to that of the eminent law firms.").
19
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Justice Harlan
Fiske Stone (undated) (on file with the Felix Frankfurter Collection, Harvard Law
School Library, Part 3, Reel 3). Frankfurter had a sympathetic audience in Stone, who
responded: "Perhaps the most astonishing manifestation of our times is the blindness
of those who have the big stake in our present system to its evils. It is the story of the
Bourbons over again." Letter from Justice Harlan Fiske Stone to Felix Frankfurter,
Professor, Harvard Law Sch. (Feb. 17, 1933) (on file with the Felix Frankfurter Collection, Harvard Law School Library, Part 3, Reel 3). Another sympathetic ear on the
Court was Louis Brandeis, who was "quiet[Iy] advising [the Roosevelt administration]
from the sidelines." Letter from Raymond Moley to Felix Frankfurter, Professor,
Harvard Law Sch. (Oct. 31, 1935) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 51).
2009]
Securities Law and the New Deal Justices
849
had no doubt that stringent regulation was needed. As he wrote after the Securities Act became law:
During the height of the greatest speculative carnival in the
world's history, billions of new securities were floated, of which a
large part had no relation to the country's need and which inevitably became worthless; worthless not merely for millions who
had sought speculative gains, but for those other millions who
sought to conserve the savings of a lifetime. By all the subtle and
mesmerizing arts of modern salesmanship, the sellers of securities had so extended the field of security buyers that 55 per cent
of all savings ... went into publicly marketed securities. The resulting losses cut from under the basic supports of a considerable
portion of the population, and especially of those helplessly dependent on income from savings. The enormous, easy profits
from their distribution stimulated the creation and sale of billions
in securities, which have burdened industry and wasted or misdirected the capital resources of the nation. 20
B. The Securities Act
Roosevelt agreed with Frankfurter that the speculative frenzy of
the 1920s had been a disaster for investors and business alike.
Stock exchange and securities legislation was on Roosevelt's early
list of "must" legislation, and Sam Untermyer had been drafted to
work on a bill as early as December 1932.21 The transition to the
new administration was hectic, and two securities bills ended up
being drafted 22 with the result that the bill regulating securities offerings that was sent to Congress was deemed a "hopeless mess." 23
At this point, Ray Moley, one of Roosevelt's key advisors,
brought Frankfurter in to sort things out.24 Frankfurter had recently
turned down Roosevelt's offer to become Solicitor General; he
thought he would be more useful to Roosevelt if he maintained the
20
Felix Frankfurter, The Federal Securities Act: II, Fortune, Aug. 1933, at 53, 54.
Raymond Moley, After Seven Years 176 (1939).
See id. at 177-78. PUHCA is another example of FDR using competing drafts of
securities legislation. See infra note 35 and accompanying text.
23
Moley, supra note 21, at 179.
24
Id.
ii
22
850
Virginia Law Review
[Vol. 95:841
independence afforded him as a law professor. 25 Frankfurter
viewed the law schools as centers for an empirical, scientific approach to the development of social reform legislation;26 here was
an opportunity to put that theory into action and at the same time
make himself useful to Roosevelt. 21 Frankfurter's success in the effort cemented his role in the administration; according to Moley,
Frankfurter's involvement in the drafting of the Securities Act
"was to make inevitable Felix's appointment to the Supreme
Court." 28
Frankfurter quickly made his way to Washington, enlisting his
Harvard colleague, Jim Landis, and two former students, Ben
Cohen and Tommy Corcoran, in the effort. 29 Frankfurter met with
25
Memorandum from Felix Frankfurter, Professor, Harvard Law Sch. (Mar. 15,
1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 60);
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin D.
Roosevelt (Mar. 14, 1933) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 60).
26
Hirsch, supra note 17, at 41.
27
Felix Frankfurter, Diary (May 8, 1933) (on file with the Felix Frankfurter Collection, Library of Congress) ("I said that having refused the request of the President for
my services as Solicitor General, I could not possibly decline the President's request,
these days, to do ad hoc jobs.").
28
Moley, supra note 21, at 180.
29
Felix Frankfurter, Diary (May 8, 1933) (on file with the Felix Frankfurter Collection, Library of Congress). Landis, Cohen, and Corcoran would eventually become
quite influential New Deal figures in their own right, but they were all Frankfurter's
proteges at that time. Frankfurter picked clerks for Brandeis, Cardozo, and Stone;
Landis had clerked for Brandeis, and Corcoran for Holmes, on Frankfurter's recom- .
mendation. Joseph P. Lash, From the Diaries of Felix Frankfurter 36 (1975). Cohen
and Corcoran remained squarely within Frankfurter's sphere of influence after they
became part of the New Deal. As Joseph Rauh put it, "When Felix came to Washington, I was working for Ben Cohen and Tom Corcoran. They were pretty important
guys, but when Felix walked in the door there wasn't any question who was boss." Joseph L. Rauh, Jr., Clerks of the Court on the Justices, in The Making of the New
Deal: The Insiders Speak 55, 63 (Katie Louchheim ed., 1983). On Cohen and Corcoran's influence, see The Janizariat, Time, Sept. 12, 1938, at 22, available at
http://www.time.com/time/magazine/article/0,9171,760147,00.html. Frankfurter's influence drew him the enmity of the Old Guard. See The Forgotten Memoir of John
Knox 70 (Dennis J. Hutchinson & David J. Garrow eds., 2002) (quoting Justice
McReynolds: "I also hope that you did not come under the influence of Frankfurter
when you were in law school. ... He is certainly one man not to be trusted! Even
though he is dangerous to the welfare of this country, he evidently has a powerful influence at the White House."); id. at 114 (quoting Justice McReynolds: "Statutes [establishing the New Deal] carelessly drawn by young men just out of the Harvard Law
School! Frankfurter's proteges, too, I suppose!")
2009]
Securities Law and the New Deal Justices
851
Moley and Sam Rayburn, chairman of the relevant House subcommittee, on a Friday; by Monday, Landis and Cohen, under
Frankfurter's supervision, had come up with a draft for the securities legislation. 3° Frankfurter supplied Rayburn with a draft of the
report for the bill,31 as well as a response to the objections made by
the Investment Bankers Association32 that captures his attitude toward the bankers: "The Investment Bankers Association and all
their tribe ... really think it is terrible that the securities business
should be made a conservative business rather than a refined and
intricate form of fleecing." 33 At the same time, however, a competing bill was proceeding through the Senate. Frankfurter worked
diligently to lobby for Landis's and Cohen's version34 and to stave
off efforts to reconcile the two bills, arguing that reconciliation
"would involve interminable delay and jeopardize passage because
powerful and increasing financial lobbies against all regulation will
exploit differences to defeat enactment."35 After a good deal of legislative maneuvering, the Senate bill was killed in conference with
the help of Senator James Byrnes, whom Roosevelt would later
30
Felix Frankfurter, Diary (May 8, 1933) (on file with the Felix Frankfurter Collection, Library of Congress).
31
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Sam Rayburn,
U.S. Rep. (Apr. 24, 1933) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 115).
32
Memorandum Commenting Upon a Memorandum Prepared By Counsel For the
Investment Bankers' Association in re H.R. 5480 (undated) (on file with the Felix
Frankfurter Collection, Library of Congress, Reel 84).
33
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Raymond Moley
(May 10, 1933) (on file with the Felix Frankfurter Collection, Library of Congress,
Reel 51).
34
See Telegram from Felix Frankfurter, Professor, Harvard Law Sch., to Raymond
Moley (Apr. 27, 1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 115); Letter from Felix Frankfurter, Professor, Harvard Law Sch., to
Raymond Moley (Apr. 28, 1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 115); Telegram from Felix Frankfurter, Professor, Harvard
Law Sch., to President Franklin D. Roosevelt (Apr. 14, 1933) (on file with the Felix
Frankfurter Collection, Library of Congress, Reel 115). On Landis's role as SEC
Commissioner, Chairman, and administrative law theorist, see Thomas K. McCraw,
Prophets of Regulation 153-209 (1984).
35
See Telegram from Felix Frankfurter, Professor, Harvard Law Sch., to President
Franklin D. Roosevelt (May 8, 1933) (on file with the Felix Frankfurter Collection,
Library of Congress, Reel 115).
852
Virginia Law Review
[Vol. 95:841
appoint to the Court. 36 Landis's and Cohen's draft, with amendments here and there, was adopted as the Securities Act of 1933. 37
While the Securities Act was working its way through Congress,
Yale law professor William 0. Douglas initially served as a cheerleader for the effort to bring in experts to tame the power of high
finance. In a letter to the New York Times, Douglas urged that the
investor
needs protection which bankers have not and will not give him.
The reputable bankers are no exception. Even they have been
known to cut corners and to be governed by the hysteria of bull
markets....
There is a need for some agency to step in between the persons who get the money and those who supply it and to fulfill the
role of protector for the latter. ... The ideal of "rugged individualism" when applied to investors has no longer any place in the
program for American high finance. 38
After the 1933 Act was enacted, however, Douglas was less favorable, concluding that the disclosure alone would not prevent the
recurrence of the scandals uncovered by Ferdinand Pecora's committee,39 dismissing it as "of secondary importance in a comprehensive program of social control over finance." 40 Privately, he was
more critical: "I think the Securities Act is a rather laborious and
untimely effort to turn back the clock and quite antithetical to
36
Maley, supra note 21, at 182-83 (noting that Byrnes helped Senate Majority
Leader Joe Robinson bury the Senate bill in conference in favor of the Frankfurter
bill). Byrnes would later play a role in navigating the Exchange Act through conference. Seligman, supra note 1, at 98-99.
37
For a firsthand account of the maneuvering, see James M. Landis, The Legislative
History of the Securities Act of 1933, 28 Geo. Wash. L. Rev. 29 (1959).
38
William 0. Douglas, Letter to the Editor, N.Y. Times, Apr. 3, 1933 (on file with
the Felix Frankfurter Collection, Library of Congress, Reel 116).
39
William 0. Douglas & George E. Bates, The Federal Securities Act of 1933, 43
Yale L.J. 171, 171 (1933) ("There is nothing in the Act which would control the speculative craze of the American public, or which would eliminate wholly unsound capital
structures. There is nothing in the Act which would prevent a tyrannical management
from playing wide and loose with scattered minorities, or which would prevent a new
pyramiding of holding companies violative of the public interest and all canons of
sound finance.").
40
Id.
2009]
Securities Law and the New Deal Justices
853
many of the other significant current developments." 41 Douglas favored bolder reform: federal incorporation and federal control of
corporate govemance.42 Douglas was anxious to involve himself in
efforts that were brewing to draft legislation to achieve those
goals.43
In pursuing federal incorporation, Douglas was simply calling for
additional liberal reforms. Yet his criticisms of the 1933 Act struck
Frankfurter as echoing the reactionary drumbeat of the investment
bankers and their corporate lawyers. Douglas worried that the Securities Act would chill capital formation:
The cumulative effects of the absolute liability of the issuer, the
undefined liability of stockholders, the liability of directors irrespective of the nature of their appointments, the liability of underwriters, and the increasing difficulty on the part of issuers to
obtain that underwriting, make it more and more apparent that,
whether rightly or wrongly, justifiably or otherwise, the Act will
prevent a great amount of financing by many companies with
well established businesses and will continue to deter refunding
operations and reorganizations. 44
41
See Letter from William 0. Douglas, Professor, Yale Law Sch., to A.A. Berle, Jr.,
Professor, Columbia Law Sch. (Dec. 29, 1933) (on file with the William 0. Douglas
Collection, Library of Congress).
42
See Letter from William 0. Douglas, Professor, Yale Law Sch., to Jerome N.
Frank, Gen. Counsel, Agric. Adjustment Admin. (Dec. 2, 1933) (on file with the William 0. Douglas Collection, Library of Congress) ("I am particularly intrigued with
your proposal for federal incorporation, as I think that only by some such beginning
can genuine progress towards protection of investors get under way.").
43
See Letter from William 0. Douglas, Professor, Yale Law Sch., to A.A. Berle, Jr.,
Professor, Columbia Law Sch. (Jan. 3, 1934) (on file with the William 0. Douglas Collection, Library of Congress) ("You can count on me to pull an oar on federal incorporation .... [P]erhaps we can begin to get at the really fundamental problem of the
increment of power and profit inherent in our present form of organization .... ").
44
Douglas & Bates, supra note 39, at 192 (footnotes omitted). Douglas conceded
some virtue in the ambiguities in the Securities Act, as they "would give the enforcing
agency a powerful weapon ... with which to control financial practices deemed inimical to the public interest." Id. at 211. His bottom line, however, was that the Act required amendment to correct its "ambiguities and inconsistencies" lest it "paralyz[ e] ... legitimate activity." William 0. Douglas & George E. Bates, Some Effects
of the Securities Act upon Investment Banking, 1 U. Chi. L. Rev. 283, 306 (1933).
854
Virginia Law Review
[Vol. 95:841
Douglas's critique drew a sharp rebuke from Frankfurter. 45 Frankfurter confided to Landis that Douglas had fallen under the sway of
the money people and their fellow travelers in the business
schools. 46 Frankfurter's main concern was that any criticism of the
law would further the conspiracy that he perceived among investment bankers and their lawyers to gut the Act:
I happen to know in some detail what some of the leading law
firms have been up to in order to create a state of mind for
amendments on the plea of recovery. You know as well as I do
that the notion that the Securities Act has stopped capital issues
is just rubbish. 47
In Frankfurter's view, Douglas was lending aid and comfort to the
foes of the New Deal by calling for the law's amendment. "It is of
course very generous of you, with everybody agin [sic] them at present, for you to champion the cause of 'the Street' and persecuted
houses like J.P.Morgan [sic] and Kuhn, Loeb." 48
Frankfurter also disagreed with some of Douglas's more ambitious ideas for the social control of finance, such as federal incorporation and direct governmental control of securities issues. Here
his Brandeisian distrust of "bigness" came through, this time directed at the federal government:
I am much more sceptical than you are, apparently, of the large
schemes of which you speak for curbing corporate abuses .... I
am not at all for federal incorporation .... Where do you men
get your great confidence in the effectiveness of piling on everything on the back of federal administration[?] I was a hot Hamil-
•s Letter from Felix Frankfurter, Professor, Harvard Law Sch., to James M. Landis,
Comm'r, Fed. Trade Comm'n (Mar. 17, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 70) ("I wrote him a letter the other day, in a halfsaucy, half-severe strain .... ").
46
Id. ("[E]ven Bill Douglas is trying to reflect too much the people in the big offices
and the business schools, among whom he likes to appear as a sound and knowing fellow.").
47
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to William 0. Douglas, Professor, Yale Law Sch. (Jan. 16, 1934) (on file with the William 0. Douglas Collection, Library of Congress).
48
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to William 0. Douglas, Professor, Yale Law Sch. (Feb. 5, 1934) (on file with the William 0. Douglas Collection, Library of Congress).
2009]
Securities Law and the New Deal Justices
855
tonian when I went to Washington in 1911, but years in the government service and all the rest of the years watching its operations intently have made me less jaunty about devices for running
a whole continent from Washington. 49
Frankfurter instead favored graduated taxation rates to penalize
"big corporations" which he believed would "prevent all sorts of
nonsense that we never could touch through a federal incorporation act." 5°Frankfurter was equally skeptical of federal government
control of securities issues:
It's awfully easy to write these nice laws for control. I think your
lawyer-banker friends would be glad to write them for you,
but ... when I think of the stuff that gets by even high-minded
judges-well, I prefer to use the taxing power . . . to curb the
mischief and abuses of corporate activities .
. . . Tax 'em, my boy, tax 'em, and otherwise reduce the opportunities for bludgeoning that interrelation and concentration of
money interests make possible. 51
49
47.
Letter from Felix Frankfurter to William 0. Douglas (Jan. 16, 1934), supra note
Id.
Id. Frankfurter had been pursuing a "tax on the bigness of corporations" since at
least 1932. See Letter from Burton K. Wheeler, U.S. Sen., to Felix Frankfurter, Professor, Harvard Law Sch. (Mar. 30, 1932) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 67); Letter from Felix Frankfurter, Professor, Harvard
Law Sch., to Burton K. Wheeler, U.S. Sen. (Apr. 4, 1932) (on file with the Felix
Frankfurter Collection, Library of Congress, Reel 67). Roosevelt endorsed Frankfurter's legislation in January 1935. Memorandum for the Secretary of the Treasury
from President Franklin D. Roosevelt (Jan. 16, 1935) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 155). Senator Burton Wheeler introduced
it into Congress shortly thereafter. Letter from Felix Frankfurter, Professor, Harvard
Law Sch., to Burton Wheeler, U.S. Sen. (Mar. 12, 1935) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 67) ("I rejoice over your introduction of
the tax on bigness .... ").
Frankfurter also discouraged Roosevelt from pursuing federal incorporation. Letter
from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin D. Roosevelt (Mar. 6, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 60) ("I notice also some talk of an Administration measure for federal incorporation.... Great difficulties are involved in such a measure, and I hope there
won't be any urgency in pushing it. Of course many abuses have found shelter under
our corporation laws. But the abuses that call for public protection and are essential
to a healthy economic life can be dealt with by a number of specific improvements in
so
51
856
Virginia Law Review
[Vol. 95:841
Douglas was most contrite in his response, 52 but he did not yield
ground on the need for federal incorporation53 and complete governmental control over investment banking54-goals he would continue to pursue as SEC chairman. 55
Frankfurter's worry that the investment bankers and corporate
lawyers were conspiring to undo the progress of the Securities Act
was a recurring theme of his correspondence in late 1933 and early
1934.56 At first he dismissed the notion of a "bankers strike" as
mere "newspaper talk," 57 motivated by the newspapers' interest in
"profitable but socially elicit financial advertising." 58 He was dismissive of investment bankers' worries that their potential "liability under the present law is more than fifty times our average
profit, even though we may make no untrue or misleading statement or leave out any material fact, merely because we may be unable to sustain the burden of proof that we have not made such er-
federal legislation, especially through the use of the taxing power, without prematurely raising the many problems that are involved in a federal incorporation law.").
52
Letter from William 0. Douglas, Professor, Yale Law Sch., to Felix Frankfurter,
Professor, Harvard Law Sch. (Feb. 19, 1934) (on file with the William 0. Douglas
Collection, Library of Congress) ("My heart would indeed 'bleed' if I thought I was
inadvertently championing the cause of 'the Street."').
53
Id. ("On analysis it will be seen that federal incorporation is only one device. But
it is a damn convenient one. Hooked up with the commerce and taxing powers it can
be made a powerful weapon for social control.").
54
Id. ("The Securities Act will be fully justified if it drives the government into the
investment banking business.").
55
Seligman, supra note 1, at 205-09 (discussing federal incorporation); Letter from
William 0. Douglas, Chairman, Sec. Exch. Comm'n, to Henry A. Wallace, Sec'y,
Dep't of Agric. (Apr. 11, 1938) (on file with the William 0. Douglas Collection, Library of Congress) (advocating a system of government investment banking).
56
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin
D. Roosevelt (July 6, 1933) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 60) ("[F]ray indeed is ahead in the administration of the Securities
Act. There are still too many in 'the Street' who think what Joe Cotton used to call
the 'green goods business'-when he passed on securities issues for his notable clients-will flourish as of old. It is hard for some folk to realize that new social and
economic standards ever come into play.").
57
See, e.g., Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Arthur
Perry (Sept. 7, 1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 84).
58
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Louis Howe (Sept.
13, 1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 84).
2009]
Securities Law and the New Deal Justices
857
rors. " 59 Frankfurter believed that corporate lawyers were misrepresenting the effects of the law to their clients as part of a "concerted
effort[] ... to chloroform the Securities Act," 60 and he lobbied
Roosevelt to resist the effort. 61 In Frankfurter's view, "no clarification is needed and 'clarification' isn't what is wanted."62 Opposition
to the law was "selfish and ignorant. " 63 Despite Frankfurter's resistance, however, the move to amend the Securities Act would
gather steam when the administration began drafting a law to regulate the New York Stock Exchange ("NYSE").64
59
Letter from Arthur Perry to Felix Frankfurter, Professor, Harvard Law Sch.
(Sept. 14, 1933) (on file with the Felix Frankfurter Collection, Library of Congress,
Reel 84). Frankfurter's response was a harbinger of the response to claims of excessive securities regulation that we hear today: "The English seem to have done very
well as the money market of the world despite their stringent controls. My patriotism
is somewhat offended-and I speak as an Anglophile-that ethical and fiduciary
standards which are legally enforced in England should be deemed too stringent for
us. I refuse to believe it." Letter from Felix Frankfurter, Professor, Harvard Law Sch.,
to Arthur Perry (Sept. 18, 1933) (on file with the Felix Frankfurter Collection, Library
of Congress, Reel 84).
60
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Justice Harlan
Fiske Stone (Sept. 28, 1933) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 64); see also Letter from Felix Frankfurter, Professor, Harvard Law
Sch., to George Brownell (Dec. 1, 1933) (on file with the Felix Frankfurter Collection,
Library of Congress, Reel 69) ("The leading law firms of New York and Boston ...
began a systematic campaign to undermine the essentials of the Act by attributing to
it the congealing of capital investment. ... [T]here isn't a particle of doubt that lawyers of responsibility and high standing infused clients with fears and worse than
that-I know what I am talking about-actually discouraged clients, at times, from
doing any financing for the present, so that the campaign against the Act, when Congress next meets, should show that the Act had prevented financing.").
61
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin
D. Roosevelt (Dec. 19, 1933) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 155); Letter from Felix Frankfurter, Professor, Harvard Law Sch., to
Henry Stimson {Dec. 19, 1933) (on file with the Felix Frankfurter Collection, Library
of Congress, Reel 84).
62
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to James M. Landis,
Comm'r, Fed. Trade Comm'n (Jan. 10, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 70).
63
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to James M. Landis,
Chairman, Sec. Exch. Comm'n (Apr. 30, 1935) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 45).
64
Letter from James M. Landis, Comm'r, Fed. Trade Comm'n, to Felix Frankfurter,
Professor, Harvard Law Sch. (Dec. 13, 1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 70) ("As you know, the Securities Act has been
opened pretty widely for discussion.").
858
Virginia Law Review
[Vol. 95:841
C. The Securities Exchange Act of 1934
The NYSE was the second bete noire of the Pecora hearings and
moved to the center of the legislative stage in the second year of
the New Deal. The NYSE claimed to be self-regulated, but at least
some observers felt that self-regulation lacked teeth. 65 Frankfurter
heartily agreed that the Exchange was "long overdue" for governmental regulation, telling Roosevelt: "There has been more than
ample time for self-regulation, and self-regulation they have shown
is not in them. " 66
Frankfurter's role here was more indirect than it had been with
the Securities Act because he was at Oxford for the year. Given the
era's limited means of communication and transportation, his lobbying was confined to telegrams and letters. On board a ship to
England, he wrote Roosevelt urging him to fight for legislation
controlling the NYSE. 67
65
As the Securities Act was working its way through Congress, Stone wrote to
Frankfurter:
Of course, the Stock Exchange should require precise information as to the total distribution made to officers and directors. The fact that it has never done so
shows how little it performs what should be its real function to protect adequately those who deal in securities sold under its auspices. Many years ago, after I had unearthed a series of shockingly fraudulent performances by members
of the Exchange, which should have been known to its Governors, I told the latter that the survival of the Exchange would depend primarily on their own willingness to take proper measures to protect adequately the interest of those who
availed of its facilities.
Letter from Justice Harlan Fiske Stone to Felix Frankfurter, Professor, Harvard Law
Sch. (May 15, 1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 64).
66
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin
D. Roosevelt (Feb. 14, 1934) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 155).
67
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin
D. Roosevelt (Oct. 1, 1933) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 155). Frankfurter quoted at length from a letter that he had received
from Stone, which Frankfurter considered particularly apt, as Stone was "an old-line
Republican, a member of Sullivan & Cromwell before he became Coolidge's Attorney General":
The new Securities Act promises well and undoubtedly will prevent some of the
fraudulent schemes which have been common in the past, especially in marketing bonds. There is another like evil that must ultimately be reached, and that is
the creation of boom markets for stocks through wash sales on the Exchange.
Id.
2009]
Securities Law and the New Deal Justices
859
Despite his distance from events on the ground, Frankfurter's influence was leveraged by the central role that Cohen and Corcoran
played in drafting the law. Cohen revised the first version of the
legislation under the influence of Pecora; the result was a draconian bill that would have fundamentally changed the operation of
the NYSE.68 The president of the NYSE, Richard Whitney, galvanized the opposition of the brokerage community, as well as the
regional exchanges, which would have been crippled by the law as
drafted. 69 Corcoran, as the administration's point man in lobbying
for the bill, fought tenaciously to preserve it. 70 Landis, however,
was somewhat more pragmatic than Frankfurter, and he recognized that the legislation would need to be modified to be enacted.11 In an effort to preserve the core of the Securities Act,
Landis took charge of the amendments to that legislation, a move
that appears to have assuaged Frankfurter's concerns. 12
The fate of the stock exchange bill, however, was still in doubt.
For Frankfurter, the exchange bill was "a test of power" 73 and the
campaign against it was tinged with anti-Semitism. 74 Cohen and
68
Seligman, supra note 1, at 85-87.
Id. at 89-93.
10
Letter from Ben Cohen to Felix Frankfurter, Professor, Harvard Law Sch. (May
11, [1934]) (on file with the Felix Frankfurter Collection, Library of Congress, Reel
69
101i.1
Letter from James M. Landis, Comm'r, Fed. Trade Comm'n, to Felix Frankfurter,
Professor, Harvard Law Sch. (Mar. 6, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 70) ("The Stock Exchange Bill is receiving a terrific
battering. All the corporate wealth of this country has gone into the attack and carried it all the way up to the White House. I think F.D. will stand very firm on its essentials, however.").
72
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to James M. Landis,
Comm'r, Fed. Trade Comm'n (Mar. 17, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 70) ("What you tell me as to the likely direction of
amendments to the Securities Act is, of course, extremely interesting and sounds like
sense.").
73
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Raymond Moley
(Apr. 24, 1934) (on file with the Felix Frankfurter Collection, Library of Congress,
Reel 71).
74
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Tom Corcoran
(May 7, 1934) (on file with the Felix Frankfurter Collection, Library of Congress,
Reel 70) ("[T]he talk against the Jews in the government comes from the powerful
financial and business interests, who have given battle and will continue to give battle
to the Administration on things like the Seucrites [sic] Act and stock exchange legislation. It's Wall Street that is using the Jewish stick precisely as it has used and will use
any other stick .... ").
860
Virginia Law Review
[Vol. 95:841
Corcoran, drafted by Moley to revise the bill, "were in constant,
almost daily, touch with Frankfurter. His function, so far as they
were concerned, had come to be more inspirational than anything
else. Felix was a patriarchal sorcerer to their apprentice, forever
renewing their zeal for reform and their pride in fine workmanship."75 Corcoran kept Frankfurter informed of the bill's progress
through a barrage of telegrams; Frankfurter sent a few telegrams of
his own to key players in the fight. 76 When the exchange bill was
eventually enacted, Frankfurter was effusive in his praise of Cohen
and Corcoran:
It was an extraordinary fight, and considering the forces and re-
sources against you, was an extraordinary achievement of a very
small handful of men for decency and for honor and for the salvage of those very institutions for which the blind men of Wall
Street profess to speak but which in their greed, had they a free
hand, they would be speedily destroying. You and Ben in particular have shown knowledge and pertinacity and devotion and
good humor and good sense .... It makes me very proud indeed
of your friendships. 77
While Frankfurter exulted in the triumph of good versus evil,
taking almost paternal pleasure in the role that his proteges played
in the fight, Douglas sensed opportunity. Early discussion of the
proposed legislation indicated that either a new commission would
be created to enforce its provisions or that the Federal Trade
Commission, already tasked with administering the Securities Act,
would be expanded to handle the new work. 78 Douglas's close
friend, Richard Smith, a public utility lawyer in New York, took
the lead in lobbying for a seat on Douglas's behalf. 19 Now that he
was pursuing a job as a regulator, Douglas downplayed his earlier
75
Moley, supra note 21, at 285.
See, e.g., Telegram from Felix Frankfurter, Professor, Harvard Law Sch., to John
Dickinson, Assistant Sec'y, U.S. Treasury (Mar. 4, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 70).
n Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Tom Corcoran
(May 7, 1934) (on file with the Felix Frankfurter Collection, Library of Congress,
Reel 70).
78
Seligman, supra note 1, at 84.
79
See Letter from Richard Smith to Francis T. Maloney, U.S. Rep. (Mar. 23, 1934)
(on file with the William 0. Douglas Collection, Library of Congress).
76
2009]
Securities Law and the New Deal Justices
861
criticisms of the Securities Act; the main thrust of his writing on the
topic, he said, was that "it is necessary to have a very powerful
commission fully equipped with a rather wide range of discretion
to handle the job. The matter simply cannot be reduced to a
code." 80 Unfortunately for Douglas, his writings could not be explained away so easily. The word from Washington was that
"Landis particularly is very resentful toward you, because of your
writings on the Securities Act. "81 Perhaps unsurprisingly given the
rebuke he had received from Frankfurter, Douglas did not ask the
Harvard professor to lobby on his behal:f82 despite Frankfurter's
well-known influence in personnel matters in the Roosevelt administration.83 In the end, Douglas was passed over for a spot on
the newly created Securities and Exchange Commission.84
80
Letter from William 0. Douglas, Professor, Yale Law Sch., to Richard Smith
(Apr. 9, 1934) (on file with the William 0. Douglas Collection, Library of Congress).
8
Letter from Richard Smith to William 0. Douglas, Professor, Yale Law Sch. (May
26, 1934) (on file with the William 0. Douglas Collection, Library of Congress). This
view was evidently shared by others. See Letter from Richard Smith to William 0.
Douglas, Professor, Yale Law Sch. (June 13, 1934) (on file with the William 0. Douglas Collection, Library of Congress) ("I received a letter from Maloney in which he
stated that he was running into opposition to you among the crowd who have resented your Articles.").
82
Letter from William 0. Douglas, Professor, Yale Law Sch., to Richard Smith
(June 12, 1934) (on file with the William 0. Douglas Collection, Library of Congress).
83
Frankfurter denied exercising such influence, despite the overwhelming evidence
to the contrary. See Letter from Felix Frankfurter, Professor, Harvard Law Sch., to
Drew Pearson (May 17, 1933) (on file with the Felix Frankfurter Collection, Library
of Congress, Reel 53).
84
Ben Cohen, who clearly had earned a spot on the Commission through his drafting efforts, was also passed over despite Tom Corcoran's lobbying efforts on Cohen's
behalf. According to Corcoran, Roosevelt was afraid to put Cohen on the newly created SEC for fear that it would provoke anti-Semitism. Telegraph from Centurion
[Tom Corcoran] to Felix Frankfurter, Professor, Harvard Law Sch. (May 30, 1934)
(on file with the Felix Frankfurter Collection, Library of Congress, Reel 70). The next
year, however, Frankfurter recommended that Roosevelt not appoint Cohen to the
SEC because Cohen was too essential to Roosevelt's legislative efforts. See Memorandum for the President from Felix Frankfurter (Aug. 21, 1935) (on file with the
Felix Frankfurter Collection, Library of Congress, Reel 155). Cohen also lost out on
the General Counsel position at the new agency when the SEC's first chairman, Joe
Kennedy, picked John Bums instead. (This scarcely reduced Frankfurter's influence;
Bums was a Harvard Law graduate, and he would soon be filling the SEC's ranks
with candidates recommended by Frankfurter.) Telegram from John J. Bums, Gen.
Counsel, Sec. Exch. Comm'n, to Felix Frankfurter, Professor, Harvard Law Sch. (May
10, 1935) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 84).
Bums was also soliciting Frankfurter's views on the interpretation of the Exchange
862
Virginia Law Review
[Vol. 95:841
Roosevelt pushed businessman Joseph P. Kennedy for chairman
over the more obvious candidate, Landis, as part of the "truce of
God" that the administration was seeking with the business community after the bitter fight over the Exchange Act. 85 Roosevelt's
rapprochement with the business community was to be short-lived.
Having vanquished the investment bankers and the New York
Stock Exchange, FDR's next target was the utility companies.
D. The Public Utility Holding Company Act of 1935
When Frankfurter returned to the United States in the summer
of 1934, he urged Roosevelt to face the "irrepressible conflict" with
big business. 86 The Exchange Act amendments relaxing the Securities Act's liability provisions had produced "[ o ]nly a trickling little
stream of private corporation finance," leading Joe Kennedy to berate the investment industry for its timidity. 87 If the capitalists were
not willing to do their part to foster economic recovery, why should
the administration placate business by holding back from further
reforms? Frankfurter
insisted that the attempt at business-government co-operation
had failed, and urged Roosevelt to declare war on business. Once
the President understood that business was the enemy, he would
be free to undertake the Brandeisian program to cut the giants
down to size: by dwarfing the power of holding companies, by
Act. Letter from John J. Burns, Gen. Counsel, Sec. Exch. Comm'n, to Felix Frankfurter, Professor, Harvard Law Sch. (Aug. 8, 1934) (on file with the Felix Frankfurter
Collection, Library of Congress, Reel 115).
85
Letter from Tom Corcoran to Felix Frankfurter, Professor, Harvard Law Sch.
(May 11, 1934) (on file with the Felix Frankfurter Collection, Library of Congress,
Reel 70) ("If Ray [Maley] is any barometer of what's going on in the White House
mind, the plan of battle is to avoid any further attempt at reforms that might bring
down more criticism during the present Congress, arrange a 'truce of God', reorganize the machinery down here to help along business recovery this summer, and in
every other way postpone all other considerations to the necessarily primary objective
of winning the Congressional elections.").
86
Parrish, supra note 13, at 244.
87
Joseph P. Kennedy, Speech to the American Arbitration Association 4 (Mar. 19,
1935) (transcript on file with the William 0. Douglas Collection, Library of Congress;
Securities Act Release No. 317, Mar. 19, 1935).
~009]
Securities Law and the New Deal Justices
863
launching antitrust suits, and by taxing large corporations more
stiffly than small business. 88
Although investment banking and the NYSE had been the primary targets of the Pecora hearings, the collapse of the Insull public utility holding company was the Enron of its day. 89 The demise
of the Insull empire cemented the public utility holding company
structure's reputation for abuse. 90 Wiley Rutledge, then dean of the
Washington University School of Law and a teacher of corporate
law, agreed with Douglas on the need for federal incorporation,
and he also shared the aversion to bigness held by Frankfurter and
the other Brandeisians. 91 Rutledge had no experience or education
in business or economics, but apparently his "brief law practice included work for a public utility that caused him to question 'the
holding company set-up. "' 92 Rutledge made the case against bigness and the abuses that it facilitated in the holding company structure.93 He argued that the "devices of share dispersion, non-voting
stock, the voting trust, etc.... multipl[y] the power to concentrate
control almost in geometric progression. " 94 Worse yet, the intricate
interconnections within the holding company empires frustrated
~ffective regulation:
The maze of "contracts" and of accounts is so intricate that no
outsider (and probably few "insiders") can determine real costs
or profits. Rate-making becomes a farce, and the balance sheet
88
Leuchtenburg, supra note 16, at 150.
See David Skeel, Icarus in the Boardroom: The Fundamental Flaws in Corporate
America and Where They Came From 8, 80-89 (2005) (discussing Insull); Richard D.
Cudahy & William D. Henderson, From Insull to Enron: Corporate (Re)Regulation
After the Rise And Fall of Two Energy Icons, 26 Energy L.J. 35, 36 (2005).
90
Recent work by Paul Mahoney casts doubt on whether that reputation was warranted. See Paul G. Mahoney, The Public Utility Pyramids 4 (Jan. 2008) (unpublished
manuscript, available at http://www2.law.columbia.edu/contracteconomics/conferences/laweconomicsS08/Mahoney%20paper.pdf).
91
John M. Ferren, Salt of the Earth, Conscience of the Court: The Story of Justice
Wiley Rutledge 93 (2004) (noting that Rutledge favored the Brandeisian notion that
the "growth of corporate enterprise has been drying up individual independence and
initiative, drying up the life of the big town and the small town, and the hamlet. We
are becoming a nation of hired men, hired by great aggregations of capital").
92
Id. at 89.
93
Wiley B. Rutledge, Editorial, The Future of the Interstate Power Holding Company, St. Louis Post-Dispatch, May 5, 1935, at Editorial Section 1.
94
Id.
89
864
Virginia Law Review
[Vol. 95:841
of the system a puzzle worse than Chinese. The corporate family
is the only ones [sic) known which can keep alive nine genera.
hons
contemporaneousl y. ~
Disclosure was not enough to correct these abuses; the federal
government needed to control corporate governance as well.
Frankfurter pushed FDR to make the holding company legislation a key component of the "second hundred days" legislative initiative in 1935.% Frankfurter had an active interest in public utilities, having taught a course on the subject from his earliest days at
Harvard. 97 With his usual impatience, he had been pushing Roosevelt to introduce legislation to control public utilities since even before Roosevelt's inauguration. 98 Frankfurter's persistence was rewarded on January 4, 1935, when Roosevelt called for the
"abolition of the evil of holding companies" in his State of the Union address to Congress. 99 Frankfurter was delighted; holding companies, he urged, "really have no ultimate economic and social justivication [sic]. That the national interest requires their elimination
I have no doubt . . . . [D ]rastic regulation and taxation are indispensable, both in themselves and also for insurance against the
possibility of alleviating legislation by a future Congress." 100 FrankId.
Hirsch, supra note 17, at 116 ("The result of Frankfurter's proddings and Roosevelt's tum of mind was the second hundred days, during which the administration
pushed for five major pieces of legislation: the social securities bill, the Wagner labor
bill, a banking bill, a holding companies measure, and a tax plan.").
97
See Felix Frankfurter, Lecture to Pub. Utils. Course (Sept. 28, 1914) (on file with
the Felix Frankfurter Collection, Harvard Law School Library, Part 3, Reel 21) (predicting that "in the immediate decades ahead, during your time and mine, there will
be a continued extension of governmental activity and governmental supervision of
business").
98
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Ray Moley (Feb.
28, 1933) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 51)
("This time I am troubling you about legislation regarding the reorganization and extension of federal public utility control. This is a subject on which F.D.R. spoke to me
when I saw him last, and as to which he desires, I am sure, early action.").
99
Quoted in Arthur M. Schlesinger, Jr., The Age of Roosevelt: 1935-1936, The Politics of Upheaval 305 (1960).
00
'
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to President Franklin D. Roosevelt (Jan. 24, 1935) (on file with the Felix Frankfurter Collection, Library
of Congress, Reel 155). Frankfurter laid the blame for the evils of the industry with
the investment bankers. Felix Frankfurter, The Public & Its Government 109-10
(1930) (criticizing role of bankers in creating elaborate holding company structures
that put utilities beyond the effective reach of regulation).
95
96
2009]
Securities Law and the New Deal Justices
865
furter (and now Roosevelt) saw the opportunity for the elimination
of holding companies; it needed to be seized, and seized quickly,
lest future administrations succumb to lobbying pressure from the
utility industry.
There was disagreement within the administration, however, on
the means to achieve this end. Ben Cohen drafted one bill, under
the direction of Robert Healy (first an FTC commissioner and subsequently an initial SEC commissioner), who had directed an exhaustive study of public utility companies by the FTC. 101 As Cohen
described it in a letter to Healy:
[T]he bill does not outlaw the holding company but regulates and
restricts the use of the holding company form and provides a
mechanism through which, over a period of time, existing holding company structures may be simplified, and their field limited
to a sphere where their economic advantages may be demonstrable.102
A Treasury Department team-under the direction of future
Justice Robert H. Jackson and Herman Oliphant-favored almost
immediate abolition through imposition of a stiff tax on dividends
paid by operating companies to the holding companies. 103 Roosevelt called the two sides together for a meeting and made it plain
that he favored rapid abolition. 104 Roosevelt's decision represented
a significant victory for the Brandeisians in the administration: the
holding companies were perhaps the most conspicuous example of
the curse of bigness. 105
101
See Letter from Ben Cohen to Robert E. Healy, Comm'r, Sec. Exch. Comm'n
(Nov. 23, 1934) (on file with the Felix Frankfurter Collection, Library of Congress,
Reel 113); see also Letter from Ben Cohen to Felix Frankfurter, Professor, Harvard
Law Sch. (Nov. 23, 1934) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 113) (soliciting Frankfurter's comments on the draft bill).
02
'
Letter from Ben Cohen to Robert E. Healy, Comm'r, Sec. Exch. Comm'n (Nov.
23, 1934) (on file with the Felix Frankfurter Collection, Library of Congress, Reel
111>·
1
Schlesinger, supra note 99, at 305.
'°'Id.
105
Leuchtenburg, supra note 16, at 156 ("The Public Utilities Holding Company Act
was a bold stroke against bigness, and the Brandeisians were delighted. 'If F.D. carries through the Holding Company bill we shall have achieved considerable toward
curbing Bigness."' (quoting Brandeis)). The bill was a victory not only for the Brandeisians, but also Brandeis himself, who had been pushing for the abolition of the holding companies behind the scenes. Bruce Allen Murphy, Elements of Extrajudicial
866
Virginia Law Review
[Vol. 95:841
The result of the meeting with Roosevelt was a clause calling for
the elimination of the holding company, which came to be known
as the "death sentence" provision. 106 The provision effectively limited utility holding companies to one geographic area; those that
did not satisfy this requirement were to be broken up under the direction of the SEC. The death sentence provision was a major de~
parture from the disclosure paradigm of the Securities and Exchange Acts. The holding company legislation followed those laws
in requiring registration and disclosure, but it broke new ground in
giving the SEC control over the utilities' capital structures and corporate governance. Thus, the legislation set a new high water mark
for federal interference with business, albeit one that governed
only a portion of American business-public utility holding companies. For opponents of federal economic regulation, the holding
company legislation looked like a trial run for the federal control
of corporate governance that Douglas and like-minded liberals had
been seeking.
The public utilities industry was considerably less enthusiastic
about being the subject of the federal government's experiments in
corporate governance. The industry predicted economic disaster if
the bill were enacted. Wendell Willkie, the president of Commonwealth and Southern (and future Republican presidential nominee), was the industry's most articulate spokesman. 107 He warned
that
the utility industry would be thrown "into a chaos of liquidation
and receiverships," holders of utility stocks would suffer "practically complete" losses, and a "great bureaucracy in Washington
will be regulating the internal affairs of practically all utility operating companies in the United States." The backers of the
death sentence, Willkie charged, were trying "to 'nationalize' the
power business of this country." 108
Strategy: A Look at the Political Roles of Justices Brandeis and Frankfurter, 69 Geo.
L.J. 101, 120 (1980).
106
Schlesinger, supra note 99, at 306.
107
Id. at 308.
108
Id. at 310.
2009]
Securities Law and the New Deal Justices
867
Although his rhetoric was shrill, Willkie's fears of socialism in
the utility industry were not entirely unfounded.'w More to the
point, it had political resonance with the voters. 110 In a major rebuff
to Roosevelt, the House rejected the death sentence provision. 111
The industry backed up its public relations attack with a grassroots lobbying campaign, but here the industry overreached. After
allegations surfaced of a raft of telegrams opposing the bill sent by
fictitious persons, a select committee chaired by then-Senator
Hugo Black was appointed to investigate the utilities' lobbying
against the holding company bill. Black pursued his investigation
"with a fanaticism not surprising in a one-time Klan member. In his
frenzy to uncover improper lobbying by certain utilities-and there
was plenty of it-Black struck at the innocent as well as the guilty.
Opposition to the bill became, ipso facto, an indication of bad
faith."m Whatever its excesses, the revelations produced by Black's
investigation gave new hope to the administration for the bill's passage.113
Even after the bill passed the Senate, however, it remained bottled up in conference committee. The key disagreement was over
the death sentence provision. The Senate's version limited holding
companies to a single "geographically and economically integrated ... system" operating in "contiguous states," while the
House version required only an "integrated public-utility system."114 The President favored the more stringent Senate version,
but Frankfurter eventually persuaded him to yield. 115 Frankfurter
drafted a compromise that used the House's "integrated public09
'
After the enactment of PUHCA, Corcoran told Moley: "It won't come fast, but
twenty years from now the government will own and operate all the electrical utilities
in the country." Moley, supra note 21, at 354.
110
But not with Douglas. Wilkie's efforts on behalf of the utility industry earned him
Douglas's bitter antipathy. See William 0. Douglas, Diary (Dec. 1, 1939) (on file with
the William 0. Douglas Collection, Library of Congress, Box 1780) ("I had had many
many contacts with Wilkie at the S.E.C. I was convinced that he was one of the most
unscrupulous men I had ever met, that he was interested only in power, for himself+
for the vested interests, that he had no principles, and that he was the most dangerous
Fascist threat on the scene.").
111
Schlesinger, supra note 99, at 311-16.
112
Moley, supra note 21, at 315; see also Schlesinger, supra note 99, at 318-23.
113
Schlesinger, supra note 99, at 323-24.
11
• Parrish, supra note 13, at 250.
us Moley, supra note 21, at 316 & n.2.
868
Virginia Law Review
[Vol. 95:841
utility system" language, but also stipulated that the system could
not be "so large ... as to impair the advantages of localized management, efficient operation, or the effectiveness of regulation. " 116
This stipulation was studiously vague; its meaning would have to be
determined by the SEC, and potentially, the courts.
E. The Chandler Act of 1938
Having created the SEC to be the government's expert agent to
regulate American business, FDR had a ready tool when his administration decided to make further inroads into corporate governance during his second term. The Chandler Act followed the
earlier pattern of FDR's securities laws by putting the SEC into the
center of important business decisions, displacing the traditional
authority exercised by investment bankers. 117 It followed PUHCA
in going beyond mere disclosure to give the agency a key substantive role in the reorganization of troubled firms. 118
Bankruptcy reorganization had been on the administration's
·original business reform agenda. Unlike the subjects of the first
term securities laws, however-public offerings, the NYSE, and the
utility holding companies-the abuses of the bankruptcy reorganization process were not as obvious to the general public. Before reform could be adopted, it was necessary to build a case documenting the abuses of the protective committees and build broader
support for government control. 119
A bankruptcy reform movement had been growing through the
1920s and into the early 1930s, with well known studies headed by
New York City lawyers Donovan and then Thatcher showing the
inadequacies of the existing system. 120 Legislation was passed in the
116
Parrish, supra note 13, at 250.
See David A. Skeel, Jr., Debt's Dominion: A History of Bankruptcy Law in
America 125 (2001) ("Within a few years, the starring role that the Wall Street bankers had played for more than fifty years was a thing of the past.").
118
Act of June 22, 1938, ch. 575, §§ 171-74, 52 Stat. 840, 890-91.
119
Ralph F. de Bedts, The New Deal's SEC: The Formative Years 109 (1964) ("In
his demand for studies and more studies Landis can be likened to the field general
who will not unnecessarily risk his forces until sure of overwhelming superiority. But
the many studies begun by Chairman Landis-and frequently used to such good advantage by his successor, William 0. Douglas-were not born of timidity.").
120
H. Comm. on the Judiciary, 7lst Cong., Report on the Administration of Bankruptcy Estates (Comm. Print 1931) (Donovan Report); Att'y Gen., Strengthening of
111
2009]
Securities Law and the New Deal Justices
869
dying days of the Hoover administration, supplemented a year
later by additional legislation under the new administration, revamping the core process for bankruptcy. These measures codified
the equity receivership proceedings long used in railroad reorganization for business reorganizations generally, but they did not address the role of investment bankers in reorganizations. 121 Among
the provisions of the Securities Exchange Act of 1934 was a directive that the new Securities and Exchange Commission study protective committees. 122 This study would help establish the political
case for fundamental changes in business reorganization. Perhaps
of greater historical significance, the protective committee study
would provide the entree for a young Yale law professor into government service.
William 0. Douglas, like Frankfurter, reflected the influence of
Brandeis: "[Brandeis's] 'Other People's Money,' had been of
course a Bible for me for years, as had his 'Curse of Bigness,' the
philosophy of which was my own. " 123 As one of the legal realists
revolutionizing legal scholarship and education, Douglas had been
pushing corporate reform for years by the time he came to the
SEC. First at Columbia and then at Yale, Douglas had sought to
reform a broad area of the business law curriculum. Bankruptcy,
however, was always a special interest of Douglas's. He had undertaken an empirical study with a New Jersey federal judge of bankruptcy filings in several districts and had been a part of the Donovan and Thatcher reform efforts. 124
Douglas's campaign to be chosen as one of the first five commissioners for the fledgling SEC had been stymied by Landis's opposition to him based on Douglas's critique of the Securities Act.
Landis's opposition to Douglas was apparently not deep rooted,
however, since Landis recruited him to conduct the study of pro-
Procedures in the Judicial System: The Report of the Attorney General on Bank·
ruptcy Law and Practice, S. Doc. No. 65, at 90-93 (1st Sess. 1932) (Thatcher Report).
121
Act of Mar. 3, 1933, ch. 204, §77, 47 Stat. 1474, 1474-82; Act of June 7, 1934, ch.
424, § 77B, 48 Stat. 911, 912-22.
m Act of June 6, 1934, ch. 404, § 211, 48 Stat. 881, 909.
123
William 0. Douglas, Diary (Mar. 26, 1939) (on file with the William 0. Douglas
Collection, Library of Congress, Box 1780).
12
' Skeel, supra note 117, at 109.
870
Virginia Law Review
[Vol. 95:841
tective committees in bankruptcy mandated by the 1934 Act. 125
Over the next several years Douglas split his time between Washington and New Haven, assembling a talented team to work on the
study, including his future Supreme Court colleague, Abe Fortas.126
This research would eventually catapult Douglas to the SEC
chairmanship, just as he had planned. 121
By the time the protective committee's study first report was
ready (there would eventually be eight volumes), bankruptcy reform was gaining momentum in Congress. 128 Douglas had now
gained his coveted seat on the Commission, and would soon succeed Landis as its chairman. He and others described the work of
the protective committee study as "briefs" for Congressional action.129 Three separate bills were under discussion, bearing the
names of three House members, Sabath, Lea, and Chandler. Sabath's bill sought to name a conservator, an official employed by
the government, for every bankruptcy. 130 The Lea bill, drafted as an
amendment to the Securities Act of 1933, focused directly on reorganization of public corporations and targeted the central role that
investment bankers played in this process. 131 Chandler's bill, proposed by the second term Congressman from Memphis, had arisen
from the efforts of a group of bankruptcy lawyers (not including
the elite firms that dominated reorganization work) that became
125
See Letter from William 0. Douglas, Professor, Yale Law Sch., to James Landis,
Comm'r, Fed. Trade Comm'n (July 12, 1934) (on file with the William 0. Douglas
Collection, Library of Congress).
126
Letter from William 0. Douglas, Professor, Yale Law Sch., to Abe Fortas, Agric.
Adjustment Admin. (Aug. 2, 1934) (on file with the William 0. Douglas Collection,
Library of Congress).
12
' Bruce Allen Murphy, Wild Bill 107 (2003) ("To Douglas, this new appointment
signaled the beginning of his rise to the top. 'Bill began telling us he would be the
chairman of the SEC,' recalled Irene Hamilton.").
128
1-8 Sec. & Exch. Comm'n, Report on the Study and Investigation of the Work,
Activities, Personnel and Functions of Protective and Reorganization Committees
(1936-40).
129
Revision of the Bankruptcy Act: Hearings on H.R. 6439 Before the H. Comm. on
the Judiciary, Reintroduced as H.R. 8046, 75th Cong. 199 (1937) (statement of William 0. Douglas, Chairman, Sec. Exch. Comm'n).
130
See Conservator in Bankruptcy, Hearing Before the Comm. on the Judiciary, H.
of Rep., on H.R. 9 and H.R. 6963, 75th Cong. 69 (1937) (statement of Adolph J. Sabath).
131
To Amend the Securities Act of 1933: Hearings on H.R. 6968 Before the H.
Comm. on Interstate and Foreign Commerce, 75th Cong. (1937).
2009]
Securities Law and the New Deal Justices
871
the National Bankruptcy Conference ("NBC"). 132 The Chandler
bill covered a host of reforms in the bankruptcy area, but did not
take up corporate reorganizations.
Douglas and Fortas were not excited about Sabath's approach;
they had not been consulted in its drafting. When the investment
bankers took aim at the Lea bill, the SEC chose to combine its
proposals with those of the Chandler bill. 133 Thus, the SEC's plan
became Chapter X of the Chandler bill. 134 The bill that Congress
passed the following year required a trustee in every public company reorganization and that any reorganization plan had to be
"fair and equitable" to be approved by the court .135
To ensure that standard was met, the bill directed courts to solicit the SEC's advice in reorganizations involving over $3 million
in debt, permitting its advice to be sought in smaller reorganizations.136 Bringing the SEC in as an advisor to the court ensured that
the agency's experts would be the key players in the reorganization
of public companies, just as the agency played the leading role in
holding company reorganizations under PUHCA. By giving the
SEC a central role, Congress thwarted efforts by investment bankers to call around and pick off creditors one by one to gain approval for a reorganization. A reorganization branch of the SEC
was established and Chairman Douglas appointed as its head Sam
Clark, a former member of the protective committee staff and the
brother of Douglas's former Yale Law dean. 137 The following year,
Congress passed the Trust Indenture Act of 1939, which closed off
132
See H. Comm. on the Judiciary, Revision of the National Bankruptcy Act, H.R.
Rep. 1409, at 1-3 (1937) (containing a chronology of the formation of the National
Bankruptcy Conference).
133
See Skeel, supra note 117, at 116-17.
134
The NBC approved the change in the spring of 1937 in a sparsely attended meeting by a split vote of 14 of its 42 members. See Revision of the Bankruptcy Act: Hearings on H.R. 6439 Before the H. Comm. on the Judiciary, Reintroduced as H.R. 8046,
supra note 129, at 364-65 (statement of John Gerdes) (recounting a meeting of the
National Bankruptcy Conference in March 1937).
135
The insertion of trustees brought broad changes in the reorganization process.
See, e.g., Robert T. Swaine, "Democratization" of Corporate Reorganizations, 38
Colum. L. Rev. 256, 259 (1938) ("In the name of 'democratization' corporate securityholders are to be enlisted in a war on corporate management. Not merely are bankers to be scourged from the temple, but corporate officers and directors are to be
driven out with them.").
136
Act of June 22, 1938, ch. 575, § 172, 52 Stat. 840, 890-91.
137
Investor's Advocate, Time, Sept. 26, 1938, at 57.
872
Virginia Law Review
[Vol. 95:841
the ability of in.vestment bankers to go outside the reorganization
process to gain contractual modifications for companies in distress.
F. Summing Up
The SEC put into action the New Deal vision that administrative
experts, not business leaders or the courts, should control the direction of the economy. PUHCA in particular gave the administrative agency a key role in deciding the terms of the breakup of the
holding companies, a question with enormous economic implications. How strictly would the SEC enforce PUHCA's purposefully
vague death sentence provision? Before that question could be resolved, PUHCA faced an uncertain judicial future. Roosevelt's appointees to the Supreme Court would eventually ensure that the
securities law would pass constitutional muster, as discussed below.
But, the constitutional question was not the only issue to be resolved by the Supreme Court. The rule of law required that the
SEC follow the terms of the statutes that gave it life. Enforcing
statutory limits on the SEC clearly was a role for the courts, but
overly stringent interpretations could hamstring the efforts of the
fledgling agency to reshape the utility industry. How much deference would the Court afford the SEC in the interpretation of its
governing statutes?
II. THE TRIUMPH OF THE ADMINISTRATIVE STATE
Through Roosevelt's first term, his battle to tame the power of
Wall Street had the strong support of Congress and the members
of his administration. The third branch of government, however,
looked much less hospitable circa 1935. The Supreme Court, called
upon to review the New Deal initiatives, was perceived as hostile
to government regulation, invoking constitutional rights of personal liberty and due process to block high profile New Deal initiatives.138 The New Dealers were experimenting with the regulatory
138
Felix Frankfurter, Justice Holmes Defines the Constitution (1938), in Law and
Politics: Occasional Papers of Felix Frankfurter 61, 74 (Archibald MacLeish & E.F.
Prichard, Jr. eds., 1939) ("Until after the 1936 election, the Court was back to the high
tide of judicial negation reached in the Lochner case in 1905."). More recent scholars
of the period have pointed out the Court's response to the administration was more
2009]
Securities Law and the New Deal Justices
873
state, and they faced considerable uncertainty with respect to
whether their experiments could pass constitutional muster. Joseph
Rauh later recalled:
I worked for Ben [Cohen] for a year on defending the Public
Utility Holding Company Act. He taught me more about how to
win a case that's unwinnable than anyone else could have. If you
had asked anyone in 1935 if the Supreme Court would uphold
the Public Utility Holding Company Act, you would have been
laughed at. 139
Would Roosevelt's securities laws fall under the judicial axe?
Roosevelt ultimately prevailed when he was able to appoint lawyers to the Supreme Court who had a proven record of supporting
a broad role for government regulation of the economy. While
waiting for enough vacancies to change the complexion of the
Court, the administration stalled the consideration of more difficult
constitutional issues, especially PUHCA's death sentence provision, betting that it could outlast the Court's Old Guard. 140 As
events unfolded, Roosevelt's appointees would ensure the survival
of the securities laws, cementing a reversal in the course of constitutional jurisprudence: the federal government now had free rein
to regulate the economy. Prior to their appointment, however,
these new Justices were also the key players in devising and implementing this strategy of delay. We saw in Part I that a number
of the Justices appointed to the Court by Roosevelt participated in
drafting and enacting the securities laws. In this section, we explore
the central roles played by future Roosevelt Court appointees in
defending the securities laws against the initial court challenges.
A. Delaying the Judicial Resolution of the Initial Challenges to the
Securities Laws
Securities laws were part of the initial flurry of legislation in the
new administration's first hundred days, but resolving the challenges to the constitutionality of the New Deal's legislative promixed. See, e.g., Barry Cushman, The Secret Lives of the Four Horsemen, 83 Va. L.
Rev. 559, 560-61 (1997).
139
Rauh, supra note 29, at 56-57 (footnote omitted).
140
John D. Fassett, New Deal Justice: The Life of Stanley Reed of Kentucky 66
(1994).
874
Virginia Law Review
[Vol. 95:841
gram did not follow as quickly. By the time the securities laws
made their way to court in the latter half of the 1930s, the Roosevelt administration was dragging out the judicial resolution as long
as possible, essentially trying to play out the clock on the Justices
most hostile to federal regulation. The challenge to PUHCA, for
example, required three visits to the Supreme Court before it was
ultimately resolved in the government's favor. The Court first addressed whether a host of individual challenges to the statute could
be stayed pending Supreme Court consideration of a test case; 141
the second case upheld only the constitutionality of the relatively
uncontroversial registration and disclosure prov1s1ons of
PUHCA; 142 and the last case-decided a decade after PUHCA's
enactment-resolved the constitutionality of the controversial
death sentence provision. 143
Administration strategists had determined to stall in defending
other parts of the New Deal legislative program as well. The strategy succeeded for a time, only to be dealt a string of defeats in 1935
and 1936. 144 The bloodiest day was Monday, May 27, 1935, when
two decisions, both unanimous: (1) struck down the National Industrial Recovery Act ("N.l.R.A."); 145 and (2) held that the President could not remove members of the Federal Trade Commission
without cause. 146 If there was any doubt that the Court was sending
Roosevelt a message, Brandeis made it perfectly clear:
Before Tommy Corcoran could depart, a Supreme Court page
tapped him on the shoulder and said that Justice Brandeis would
like to see him in the Justices' robing room. Brandeis wanted
141
Landis v. North American Co., 299 U.S. 248, 249 (1936).
Elec. Bond & Share Co. v. SEC, 303 U.S. 419, 442-43 (1938).
143
See N. Am. Co. v. SEC, 327 U.S. 686, 704 (1946).
144
William E. Leuchtenburg, The Supreme Court Reborn: The Constitutional Revolution in the Age of Roosevelt 84-89 (1995) ("The [Roosevelt] Administration put off
tests of the constitutionality of the legislation of the First Hundred Days as long as
possible; as a result the Supreme Court did not have the opportunity to rule on a New
Deal statute until 1935.").
145
A.LA. Schechter Poultry Corp. v. United States, 295 U.S. 495, 542 (1935).
McReynolds credited the Schechter decision with restoring business confidence. The
Forgotten Memoir of John Knox, supra note 29, at 72 (quoting McReynolds:
"[B]usinessmen throughout the country have become more and more confident because of the Court's [Schechter] decision .... The decision stimulated industry, which
had been hampered by the N.R.A. laws.").
·
146
Humphrey's Executor v. United States, 295 U.S. 602, 632 (1935).
142
2009]
Securities Law and the New Deal Justices
875
Corcoran to convey a message to the White House: "This is the
end of this business of centralization, and I want you to go back
and tell the President that we're not going to let this government
centralize everything. It's come to an end." 147
SEC General Counsel John Burns, in a letter to Frankfurter,
noted "how stunned and gloomy the action of the court left us ....
It appears likely that both of our statutes will be attacked with
more vigor." 148 The old guard appeared skeptical of Roosevelt's
"road to socialism";149 Brandeis and the other liberals opposed
regulation that fostered "bigness." The confluence of the two positions resulted in a stiff rebuke for the Roosevelt administration. 150
1. Jones v. SEC: The SEC as "Star Chamber"
At the time of those Black Monday decisions, the SEC had just
launched the case that would be the Supreme Court's first opportunity to pass on the new securities laws. It would not be an auspicious beginning for the SEC in the Supreme Court. On May 4,
1935, J. Edward Jones, a dealer in oil royalties, had filed a registration statement to issue certificates in producing such royalties. Just
before the end of the twenty-day waiting period required before a
registration statement can become effective under the Securities
Act, the SEC filed notice of a stop order proceeding and subpoenaed Jones and various documents. When Jones's attorney appeared at the hearing without his client and sought to withdraw the
registration statement to end the proceeding, SEC General Coun147
Irons, supra note 16, at 104.
Letter from John Burns, Gen. Counsel, Sec. Exch. Comm'n, to Felix Frankfurter,
Professor, Harvard Law Sch. (May 29, 1935) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 84).
149
The Forgotten Memoir of John Knox, supra note 29, at 72 (quoting McReynolds:
"[I]f it were not for the Court, this country would go too far down the road to socialism ever to return.").
iio Frankfurter himself was not that distressed by the invalidation of the N.I.R.A.
According to Moley,
There's no doubt that Frankfurter, a Brandeis devotee, had a deep antipathy to
both the A.A.A. and the N.I.R.A. He, as well as most of his young disciples in
Washington, opposed the loosening up of the antitrust laws involved in the
N.I.R.A. principle. As avowed enemies of bigness in business, viewing government's role as that of policeman, rather than coordinator, they looked upon
N.I.R.A.'s invalidation with no little satisfaction.
Moley, supra note 21, at 306-07.
148
876
Virginia Law Review
[Vol. 95:841
sel Burns is said to have responded "You can't go up under the gun
of a stop order and then seek to avoid it"; the Commission then
"ordered a U.S. marshal to go forth and fetch Mr. Jones in person."151 The Commission's impatience led it into strategic error; at
that point, Jones reversed course and announced this case to be
"an excellent opportunity to test out in a clean-cut fashion the
much-mooted question of the constitutionality of the securities
acts. " 152
The lower federal courts upheld the SEC's refusal to permit
withdrawal of the registration statement; more importantly, they
affirmed the constitutionality of the Act. 153 Jones quickly appealed.
After the argument of the case in the Supreme Court, Landis reported to Frankfurter that "[t]he only possibility of defeat is on a
procedural point and yet I cannot see a sane bench of judges not
giving us some freedom in working out our procedural technique. "154
The Supreme Court shortly gave Landis reason to question the
Justices' sanity. It ruled against the SEC on the withdrawal issue,
thereby avoiding, for the moment, the constitutional issue. 155 The
tenor of the opinion, however, did not bode well for the Act's constitutionality.156 The 6-3 majority consisted of the "Four Horsemen"
(Justices Butler, McReynolds, Sutherland, and Van Devanter), the
key bloc overturning central parts of the New Deal, joined by
Chief Justice Hughes and Justice Roberts. 157 Sutherland's opinion
151
Royalist's Revelations, Time, July 1, 1935, at 47, available at
htto://www.time.com/time/printout/0,8816,770055,00.html.
I~ Id.
153
SEC v. Jones, 12 F. Supp. 210, 213 (S.D.N.Y. 1935), aff'd, 79 F.2d 617 (2d Cir.
1935), rev'd, 298 U.S. 1 (1936).
154
Letter from James Landis, Chairman, Sec. Exch. Comm'n, to Felix Frankfurter,
Professor, Harvard Law Sch. (Mar. 11, 1936) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 45).
155
Jones v. SEC, 298 U.S. 1, 28 (1936).
6
" See generally id. The Court said the stop order proceeding had the effect of suspending the operation of the registration statement; the appellate court had ruled that
the registration statement remained effective, since no stop order had been issued. Id.
at 15.
157
Justice Sutherland wrote the opinion for the court despite not having heard oral
argument in the case, participating via the "vouch[ing in]" approach that Chief Justice
Hughes employed. Letter from Justice William 0. Douglas to Justice Arthur Goldberg (Jan. 18, 1964) (on file with the William 0. Douglas Collection, Library of Congress).
2009]
Securities Law and the New Deal Justices
877
for the Court treated the securities registration process as little
more than a license to use the mails. 158 Under the common law,
such a license would carry with it an absolute right to withdraw. 159
More provocatively, Sutherland characterized the SEC's investigation not based on specified grounds as infringing on the "constitutional safeguards of personal liberty." 160
Although the government avoided a direct constitutional loss,
the Court did not shrink from finding the agency was running afoul
of personal liberties the Court was determined to protect. 161 Labeling the action of the Commission as "wholly unreasonable and arbitrary," the Court stressed the need to block unauthorized powers
by "lesser agencies" as well as the three primary departments of
the government, concluding that the Commission's action
amounted to a "fishing bill." The Court's opinion lumped together
the SEC's investigation, which was not based on specified grounds,
with the "intolerable abuses of the Star Chamber which brought
that institution to an end at the hands of the Long Parliament in
1640."162 The Court took the occasion to announce that it stood
vigilant to check such abuses: "Even the shortest step in the direction of curtailing one of these rights must be halted in limine, lest it
serve as a precedent for further advances in the same direction, or
for wrongful invasions of the others." 163
Cardozo's dissent, joined by Stone and Brandeis, ridiculed the
comparison of the SEC to the Star Chamber:
A Commission which is without coercive power, which cannot
arrest or amerce or imprison though a crime has been uncovered,
or even punish for contempt, but can only inquire and report, the
propriety of every question in the course of the inquiry being
subject to the supervision of the ordinary courts of Justice, is lik-
158
159
Jones, 298 U.S. at 22.
Id at 23.
'"'Id.
Reed had not predicted a tougher go on the constitutional argument. He wrote
Homer Cummings, the Attorney General, that '"I think that if we lose, it will be on
the statutory construction point and not on the constitutional point. We may get a
good result and I would be very much surprised if we got a bad result."' Fassett, supra
note 140, at 121.
162
Jones v. SEC, 298 U.S. 1, 28 (1936).
•63 Id.
161
878
Virginia Law Review
(Vol. 95:841
ened with denunciatory fervor to the Star Chambers of the Stuarts. Historians may find hyperbole in the sanguinary simile. 164
Justice Stone grumbled to Frankfurter that the opinion "was
written for morons. " 165 Frankfurter complained that the Court was
"making a mockery of great fundamental constitutional experiences and traditions to invoke them with the silly irrelevance with
which they were invoked" in Jones. 166 Stone responded that Jones
was an example of the Supreme Court at its worst. He observed:
I do not suppose the heavens will fall, whether or not Mr. J. Edward Jones, in a public hearing, surrounded by all the safeguards
of the Constitution, is compelled to explain the discrepancies of
his statements in the public document which he had filed, but
when our Court sets at naught a plain command of Congress,
without the invocation of any identifiable prohibition of the Constitution, and supports it only by platitudinous irrelevancies, it is
a matter of transcendent importance. 167
Whatever the quality (or long-term impact) of the opinion, the
decision resonated in the public debate at the time. 168 Frankfurter
passed on to Stone an observation from SEC general counsel
Burns: "There is hardly a crook in the country whose lawyer does
not come in to read juicy extracts from Sutherland's oration ....
[T]his decision will be a constant source of annoyance in our enforcement activities. " 169
164
Id. at 33 (Cardozo, J., dissenting).
Letter from Justice Harlan Fiske Stone to Felix Frankfurter, Professor, Harvard
Law Sch., (Apr. 7, 1936) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 64).
166
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Justice Harlan
Fiske Stone (Apr. 7, 1936) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 64).
167
Letter from Justice Harlan Fiske Stone to Felix Frankfurter, Professor, Harvard
Law Sch. (Apr. 9, 1936) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 64).
168
Fassett, supra note 140, at 124 ("The Jones decision was publicized by opponents
of the New Deal as affording proof that FDR's alphabet agencies did in fact engage in
'Star Chamber' proceedings.' Enforcement actions pursuant to the securities acts particularly were seriously impeded as claims of abuse of administrative powers proliferated.").
169
Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Justice Harlan
Fiske Stone, (May 18, 1936) (on file with the Felix Frankfurter Collection, Library of
Congress, Reel 64) (quoting John Bums).
165
2009]
Securities Law and the New Deal Justices
879
With the Court's decisions in the months on either side of the
Jones case invalidating the Agricultural Adjustment Act170 and the
Bituminous Coal Conservation Act, 171 the constitutional fate of the
securities acts remained in doubt. To face that challenge, the administration deployed a considerable array of legal talent, bringing
the leading legal lights of the New Deal to bear. Solicitor General
Stanley Reed argued the Jones case before the Court; Reed regularly consulted Frankfurter regarding litigation strategy.in The
Roosevelt administration also brought Robert Jackson in as special
counsel to aid the SEC; Jackson had been serving as assistant general counsel at the Treasury. 113
At times the legal team and the political team overlapped. The
briefs in the North American case, 114 addressed in the next section,
for example, were prepared by the same team as Jones-Attorney
General Homer Cummings, Solicitor General Stanley Reed, and
SEC General Counsel John Bums-again reinforced by now175
Assistant Attorney General Robert Jackson. Also on the briefs
as special counsel were Ben Cohen and Tommy Corcoran, Frankfurter's all-purpose pair who had come to Washington in 1933 to
rewrite the Securities Act and stayed to fill a variety of roles in the
110
United States v. Butler, 297 U.S. 1, 74 (1936).
Carter v. Carter Coal Co., 298 U.S. 238, 311-17 (1936).
172
See, e.g., Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Stanley
Reed, Solicitor Gen. (Feb. 15, 1936) (on file with the Felix Frankfurter Collection,
Harvard Law School Library, Reel 2); Letter from Stanley Reed, Solicitor Gen., to
Felix Frankfurter, Professor, Harvard Law Sch. (Dec. 17, 1936) (on file with the Felix
Frankfurter Collection, Harvard Law School Library, Part 3, Reel 2) ("My own views
have not chrystalized [sic]. Can you help me?"); Letter from Felix Frankfurter, Professor, Harvard Law Sch., to Stanley Reed, Solicitor Gen. (Dec. 7, 1936) (on file with
the Felix Frankfurter Collection, Harvard Law School Library, Part 3, Reel 2) ("I appreciate your thoughtfulness in sending me a copy of your confidential memorandum
on pending matters involving administration measures."). Frankfurter also consulted
with John Burns, the SEC's general counsel. See Letter from John Burns, Gen. Counsel, Sec. Exch. Comm'n, to Felix Frankfurter, Professor, Harvard Law Sch. (Oct. 18,
1935) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 115)
(discussing litigation strategy with respect to constitutional issues).
173
Letter from Robert H. Jackson, Asst. Gen. Counsel, Treasury Dept., to Herman
Oliphant, Gen. Counsel, Treasury Dept. (Dec. 8, 1935) (on file with the Robert Jackson Collection, Library of Congress, Box 66).
174
Landis v. N. Am. Co., 299 U.S. 248 (1936).
175
Brief for the Petitioners at 97, Landis v. N. Am. Co., 299 U.S. 248 (1936) (Nos. 221171
22).
880
Virginia Law Review
[Vol. 95:841
New Deal, including drafting and lobbying for the Exchange Act
and PUHCA. 116
2. PUHCA 's Opening Act: Finding a Test Case
During the nine months that it took for the Jones case to move
from the SEC to a Supreme Court resolution, litigation was beginning that would lead to the Court's next two securities cases.
PUHCA was enacted in August 1935, becoming effective on December 1 of that year. A flood of lawsuits quickly followed from affected companies seeking injunctions to block the enforcement of
the law; 177 the government looked to litigate the case with the
strongest facts. 118 Electric Bond & Share Co. v. SEC, 119 with its maze
of subsidiaries, was that test case. The government filed a suit in
New York federal court on November 26 that would eventually
become the vehicle for the first Supreme Court opinion on the constitutionality of PUHCA's registration provisions. 180 On the same
day, the North American Company, a large holding company, filed
a suit in the District of Columbia that would first become the basis
for the Supreme Court's consideration of whether a stay was permissible, and then the ultimate decision on the Act's constitutionality. That decision would come more than a decade after the suit
was first filed.
In January 1936, the government persuaded the district court in
the District of Columbia to grant a stay in the North American
case, but the D.C. Circuit reversed in June, with the four judges
splitting 2-1-1. 181 The Supreme Court heard the case a week after
Roosevelt's smashing landslide in the 1936 election. Within a
month, a unanimous court reversed the Court of Appeals, permitting a stay of the other cases until the decision of the trial court in
176
Lash, supra note 29, at 36.
Am. Co., 299 U.S. at 252 (noting that forty-seven other cases had been filed);
Seligman, supra note 1, at 134.
178
William 0. Douglas, Go East Young Man: The Early Years 278 (1974).
179
303 U.S. 419 (1938).
180
Courts in jurisdictions other than the D.C. Circuit could not compel the SEC to
be a party, so the SEC could control its venue as long as it did not attempt to enforce
the act. Seligman, supra note 1, at 137.
181
N. Am. Co. v. Landis, 85 F.2d 398, 401 (D.C. Cir. 1936).
m N.
2009]
Securities Law and the New Deal Justices
881
New York. 182 In contrast to the hostility toward the SEC and its
processes that was visible in Jones, this opinion, written by Justice
Cardozo for a unanimous Court, was considerably more accommodating toward agency action:
We must be on our guard against depriving the processes of justice of their suppleness of adaptation to varying conditions. Especially in cases of extraordinary public moment, the individual
may be required to submit to delay not immoderate in extent and
not oppressive in its consequences if the public welfare or convenience will thereby be promoted. In these Holding Company
Act cases great issues are involved, great in their complexity,
great in their significance .... An application for a stay in suits so
weighty and unusual will not always fit within the mold appropriate to an application for such relief in a suit upon a bill of
goods. 183
Not only did the SEC win, but the caustic language of Jones had
also disappeared.
Despite this procedural victory, PUHCA, like other New Deal
legislation, remained at risk in the shadow cast by the Supreme
Court's constitutional holdings in 1935 and 1936. In the weeks immediately after Landis, President Roosevelt announced his Courtpacking plan, which was met by a barrage of criticism that dominated political debate for the first half of 1937. The Supreme Court
that would eventually uphold the constitutionality of economic
regulation, including the securities laws, was not yet visible.
3. Litigating the Chosen Case: Electric Bond & Share
While the Court-packing debate was unfolding in Congress and
the media, the government was litigating its chosen PUHCA case,
Electric Bond & Share, 184 on narrow ground. In January 1937, the
district court (with Circuit Judge Mack as the trial judge) ruled that
182
Landis v. N. Am. Co., 299 U.S. 248, 259 (1936). McReynolds concurred in the result without opinion and Stone did not participate, likely because of his prior partnershig with Sullivan & Cromwell, the law firm for the company.
1
Id. at 256. The stay approved by the Court was narrow, however, extending "[f]or
the moment" only until the first district court decision in the New York litigation. Id.
at 256-57.
184
SEC v. Elec. Bond & Share Co., 18 F. Supp 131 (S.D.N.Y. 1937).
882
Virginia Law Review
[Vol. 95:841
the constitutionality of the registration provisions of the legislation
could be separated from the more controversial provisions permitting the SEC to impose the death sentence on a holding company;
the court then upheld the constitutionality of the registration provisions.185 The Second Circuit affirmed in a split decision. 186
Time was on the Roosevelt administration's side. In the period
between the district court and Supreme Court decisions, Roosevelt's Court-packing plan had been rebuffed by Congress, but the
Court's direction had nonetheless changed radically. The West
Coast Hotel decision upholding the Washington state minimum
wage act was announced on March 29, 1937,187 and was quickly (if
erroneously) immortalized as "the switch in time that saved
nine." 188 In subsequent opinions that term, the Court upheld the
National Labor Relations Act1 89 and the Social Security tax. 190 At
the end of the term, Willis Van Devanter retired, to be replaced by
Hugo Black, and by the middle of the following term when the
Court heard arguments in Electric Bond, Sutherland had also retired. Although Justice Sutherland's replacement, Solicitor General Stanley Reed, did not participate in the decision, the departure
185
Id. at 147. This was friendly ground for the SEC; Mack was a friend of Frankfurter and Cohen had served as his law clerk. Seligman, supra note 1, at 136.
186
Judge Manton's lead opinion upheld the registration provisions as akin to registration of securities. Elec. Bond & Share Co. v. SEC, 92 F.2d 580, 590 (2d Cir. 1937).
Judge Swan concurred in the result without an opinion, id. at 593 (Swan, J., concurring in the result), and Learned Hand wrote separately to say he would uphold sections 4 and 5 (the registration provisions) along with sections 6, 7, 9, and 10 after
doubtful portions were removed. Id. (Hand, J., concurring).
181
West Coast Hotel Co. v. Parrish, 300 U.S. 379, 400 (1937).
188
On the original source of the phrase, see G. Edward White, The Constitution and
the New Deal 17 (2000). Scholars have recently questioned the extent to which Roberts "switched," given that he voted at the conference before the announcement of
the Court-packing plan. See, e.g., Barry Cushman, Rethinking the New Deal Court:
The Structure of a Constitutional Revolution 103 (1998) [hereinafter Cushman, Rethinking the New Deal Court]. At the time, however, Frankfurter viewed the switch
as transparent. See Letter from Felix Frankfurter, Professor, Harvard Law Sch., to
President Franklin D. Roosevelt, (Mar. 30, 1937) (on file with the Felix Frankfurter
Collection, Harvard Law School Library, Reel 155) ("And now, with the shift by
Roberts, even a blind man ought to see that the Court is in politics, and understand
how the Constitution is 'judicially' construed."). Professor Cushman, in his commentary in this symposium, addresses Frankfurter's later view backing away from his earlier comment. See Barry Cushman, The Securities Laws and the Mechanics of Legal
Change, 95 Va. L. Rev. 927, 933 (2009).
189
NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 43 (1937).
190
Steward Machine Co. v. Davis, 301U.S.548, 598 (1937).
2009]
Securities Law and the New Deal Justices
883
of two of the four Horsemen changed the balance of power on the
Court.
Oral arguments before the Supreme Court went on for three
days in early February 1938; Robert Jackson and Ben Cohen argued for the govemment. 191 Six weeks later, in an opinion by Chief
Justice Hughes, the Court ruled 6-1 that the registration provisions
were separable and that regulation requiring the submission of information was both familiar and constitutional. m Thus, the Court
both upheld a portion of PUHCA and implicitly affirmed the constitutionality of the Securities Act and the Exchange Act. Although
the Court upheld the registration provisions, it declined to consider
constitutional challenges to PUHCA's much more controversial
reorganization provisions. 193 Nonetheless, the SEC, under the leadership of then-Chairman William 0. Douglas, took the Court's decision as a green light to begin enforcing PUHCA. 194 Frankfurter
telegrammed congratulations to Jackson when the decision was
announced. 195
B. The New Deal Justices on the Court
1. U.S. Realty and the Emergence of the Roosevelt Court
The outcome of U.S. Realty196 in May 1940 made plain the triumph of the administrative state in the securities arena and the
191
Letter from Stanley Reed, Solicitor Gen., to Felix Frankfurter, Professor, Harvard Law Sch., (Dec. 19, 1937) (on file with the Felix Frankfurter Collection, Harvard
Law School Library, Reel 56) ("We are filing our response in E. B. & S. tomorrow.
Ben and Bob Jackson are to argue it. I think they have both earned the right .... "). A
colleague described to Frankfurter Cohen's argument in an "electric" courtroom. Letter from Dave G[insburg] to Felix Frankfurter, Professor, Harvard Law Sch. (Feb. 12,
1938) (on file with the Felix Frankfurter Collection, Harvard Law School Library,
Reel 27).
192
Elec. Bond & Share Co. v. SEC, 303 U.S. 419, 442-43 (1938). Hughes's opinion
gained the support of Butler and Roberts from the Jones majority as well as Brandeis
and Stone from the minority and new appointee Black (who had helped push the law
through the Senate). McReynolds dissented without opinion. Reed, who was solicitor
general when the case was argued below, did not participate, nor did Cardozo, who
died shortly after the term ended.
193
Id. at 443.
194
Seligman, supra note 1, at 179-80.
195
See Telegram from Felix Frankfurter, Professor, Harvard Law Sch., to Robert H.
Jackson, Solicitor Gen. (Mar. 30, 1938) (on file with the Felix Frankfurter Collection,
Harvard Law School Library, Part 3, Reel 1).
196
SEC v. U.S. Realty & Improvement Co., 310 U.S. 434 (1940).
884
Virginia Law Review
[Vol. 95:841
central role the New Deal Justices played in that transformation.
At issue was the SEC's authority under the Chandler Act in company reorganizations. Robert Jackson, soon to be the seventh of
FDR's eight appointments to the Court, argued the case as the nation's Attorney General. By that time, the Court had already been
transformed. The change is best seen by comparing the result in
U.S. Realty with Jones v. SEC, the non-PUHCA securities case that
had been decided four terms earlier. In U.S. Realty, a 5-3 majority
approved a broad role for the SEC in a corporate reorganization in
bankruptcy .197 Stone (long sympathetic to the goals of the Roosevelt administration, as we have seen) joined with four new Roosevelt appointees to make a majority; the three remaining members
of the Jones majority (Hughes, Roberts and McReynolds) were
now in dissent. 198
Like PUHCA, this act allowed the SEC an oversight role in corporate transactions, here bankruptcy reorganizations. Stone's majority opinion connects Chapter X to the other New Deal securities
statutes, each of which injects the SEC's "impartial and expert administrative assistance" for the protection of the public. 199 Stone's
opinion upheld the trial court's determination-following the recommendation of the SEC-that the bankrupt company should be
required to reorganize under the new Chapter X provided by the
Chandler Act, rather than under Chapter XI. The SEC had argued
that Chapter XI did not provide the safeguards of an independent
trustee or the SEC as a monitor. The Court rejected the Commission's argument that public companies always must reorganize under Chapter X because it did not find a bright-line division between public and private companies in the statutory language.
Nevertheless, the Court gave the SEC broad license to police improper uses of Chapter XI, despite the fact that the Act was
equally silent on this point. 200 The opinion below had concluded
197
Id. at 460-61.
Id. at 441, 461, 469. Douglas did not participate. Id. at 461.
199
Id. at 448 n.6 ("The basic assumption of Chapter X and other acts administered
by the Commission is that the investing public dissociated from control or active participation in the management, needs impartial and expert administrative assistance in
the ascertainment of facts, in the detection of fraud, and in the understanding of complex financial problems.").
200
The Court found:
198
2009]
Securities Law and the New Deal Justices
885
that "[a] governmental agency has no general right of intervention
'in the public interest.'" 201 The Court's majority, however, located
that authority in the public policy of the Act, including not just the
statute's terms but also in the equity power of the bankruptcy
court.202
Douglas did not participate in the decision. For three years he
had headed the SEC's reorganization project which had culminated in Chapter X of the Chandler Act. Moreover, he was chairman of the SEC when that initiative was attached to other parts of
bankruptcy reform. By his account, however, there was no basis for
disqualification:
I sat on the case[.] I was not disqualified, having nothing to do
with the matter when I was at the SEC. But I discovered later
that the CJ [Hughes] was very anxious to have me withdraw.
Stone told me "The Chief would like to have you out of the
case." "Why?" I asked. "Because your vote will make it more
difficult for him to carry the Court," said Stone. So [I] spoke to
the Chief, telling him that I was not disqualified but stating that
perhaps I should not participate. He said he thought that would
be wise, since I had been so recently connected with the SEC. If
the Chief had had his way, it would be another Jones decision. 203
Notwithstanding his formal non-participation, Douglas's views
may have shaped the debate. He wrote a memorandum in the case,
The Commission's duty and its interest extend not only to the performance of
its prescribed functions where a petition is filed under Chapter X, but to the
prevention, so far as the rules of procedure permit, of interferences with their
performance through improper resort to a Chapter XI proceeding in violation
of the public policy of the Act ....
Id. at 459.
201
In re U.S. Realty & Improvement Co., 108 F.2d 794, 798 (2d Cir. 1940).
202
SEC v. U.S. Realty & Improvement Co., 310 U.S. 434, 448 (1940).The Court
stated that "we cannot assume that Congress has disregarded well settled principles of
equity." Id. at 457. The dissent, by Justice Roberts, joined by Hughes and Butler,
sought to refute the SEC's argument of a bright line between chapters X and XI. Id.
at 464 (Roberts, J., dissenting). The Court's majority did not draw such a line, focusing instead on a trial court's discretion to use its power in particular circumstances. Id.
at 455 (majority opinion).
203
William 0. Douglas, Diary (May 27, 1940) (on file with the William 0. Douglas
Collection, Library of Congress, Box 1780). Douglas's account is certainly open to
question; it is somewhat difficult to imagine the magisterial Hughes stooping to such a
gambit, and it seems somewhat unlikely that he would use Stone as his messenger.
886
Virginia Law Review
[Vol. 95:841
which he shared with Frankfurter and perhaps with Stone, which
rejected the sharp line between Chapters X and XI for which the
SEC had argued. Instead, Douglas suggested guidelines for the exercise of judicial discretion. 204 Douglas's guidelines are consistent
with, although not identical to, the reasons offered in Stone's opinion.
With U.S. Realty, the triumph of the administrative state was
complete. In four years, the SEC had gone from being denounced
as a "Star Chamber" in Jones to being deemed essential to investor
protection in U.S. Realty. This transformation was a critical part of
the Roosevelt administration's overall judicial triumph. 205
Three unanimous opinions during the term following U.S. Realty
show the Roosevelt Court's generous approach to securities cases.
204
Note from Justice Felix Frankfurter to Justice William 0. Douglas (undated), appended to Memorandum from William 0. Douglas on SEC v. U.S. Realty & Improvement Co. (undated) ("Bill, Hadn't you better send a copy of this memo to
Stone? FF") (on file with the William 0. Douglas Collection, Library of Congress).
In overturning the Second Circuit's decision, the Supreme Court had the benefit of
a strong dissenting opinion authored by Judge Charles Clark. Clark asserted that the
Court of Appeals' decision "goes far to render abortive what might have proved one
of the most important corporate reforms of modern times." In re U.S. Realty & Improvement Co., 108 F.2d at 802 (Clark, J., dissenting). Clark, who had been Dean of
Yale Law School during the decade in which Douglas split his time between New Haven and Washington, knew Douglas well. What is more, Clark's brother Sam had
worked with Douglas on the protective committee report and later was named by
Chairman Douglas as first head of the agency's reorganization section. Investor's Advocate, Time, Sept. 26, 1938, at 57, available at http://timeinc8-sdll.websys.aol.com/
time/printout/0,8816,788825,00.html.
Douglas participated in the Court's next case addressing the securities aspect of
bankruptcy, writing the opinion for the Court in General Stores Corp. v. Shlensky, 350
U.S. 462 (1956). That opinion tracks Douglas's earlier memo and Stone's U.S. Realty
opinion in rejecting a bright line approach; the opinion suggests criteria, now grouped
under the heading of "needs to be served" for determining when bankrupts must proceed through Chapter X. Id. at 466. Douglas's adherence to a multifactor test left the
door open to public corporation reorganization through Chapter XI. That space allowed companies to avoid the SEC's role in reorganizations. The SEC's participation
was largely eliminated with the bankruptcy reforms of 1978. See David A. Skeel, The
Rise and Fall of the SEC in Bankruptcy 2-3 (Inst. for Law & Econ., Working Paper
No. 267, 1999), available at http:/lpapers.ssrn/paper.taf?abstract_id=l 72030.
~ See Leuchtenburg, supra note 144, at 154. ("This new Court-the 'Roosevelt
Court' as it was called-ruled favorably on every one of the New Deal laws whose
constitutionality was challenged. It expanded the commerce power and the taxing and
spending power so greatly that it soon became evident that there was almost no statute for social welfare or the regulation of business that the Court would not validate.").
2
2009]
Securities Law and the New Deal Justices
887
Deckert v. Independence Shares Corporation, written by Murphy,
overturned a court of appeals decision that had blocked relief
against third parties under the Securities Act. 206 In permitting the
plaintiff to go beyond express money judgment against the seller
provided by Section 12(1) of the Act, the Court took a broad view
of remedies (and thus anticipated the Barak case that arose a quarter century later207 ):
The power to enforce implies the power to make effective the
right of recovery afforded by the Act. And the power to make
the right of recovery effective implies the power to utilize any of
the procedures or actions normally available to litigant according
to the exigencies of the particular case. 208
The other two securities decisions handed down that term had
less lasting significance. A.C. Frost & Co. v. Coeur D'Alene Mines
Corporation 209 was Justice McReynolds' last opinion for the Court
before his midterm retirement; he was the last of the Four Horsemen to depart the Court. The Court overturned a broad Idaho Supreme Court decision that declared an agreement in violation of
the Act to be void ab initio. 210 Edwards v. United States, the third
case of that term and the first criminal securities case to reach the
Court, was a rare, albeit mild, post-Jones rebuke to the government.211 Justice Reed, writing for the Court, overturned a convic-
311 U.S. 282 (1940). Douglas did not participate. The injured investor was
unlikely to be able to recover from the asserted wrongdoer, but there were funds that
had been paid to a bank which had acted as trustee. Id. at 284-85, 291.
200
J. I. Case Co. v. Borak, 377 U.S. 426, 433-34 (1964) (discussing the "duty of the
courts to be alert to provide such remedies as are necessary to make effective the
congressional purpose" and quoting Deckert, 311 U.S. at 288).
208
Deckert, 311 U.S. at 288 ("That it does not authorize the bill in so many words is
no more significant than the fact that it does not in terms authorize execution to issue
on a judgment recovered under § 12(2). ").
200
312 U.S. 38 (1941). Douglas did not participate. Id. at 45.
210
Id. at 44-45. The SEC was concerned that such a broad holding could thwart protections for the investing public in other situations; the Court agreed without getting
into questions such as in pari delicto. The Court quoted extensively from a SEC
memorandum expressing concern that a void ab initio holding would prevent an issuing company from recovering the sales proceeds from its underwriter in a transaction
where there had been a violation. Id. at 43 n.2.
211
312 U.S. 473 (1941). Douglas did not participate. Id. at 484.
2()6
888
Virginia Law Review
[Vol. 95:841
tion when the defendant had not been provided a transcript of his
appearance in an SEC investigation. 212
The remaining two non-PUHCA securities cases of this earliest
period are the ones most familiar to current students of securities
laws. In SEC v. C.M. Joiner Leasing Corp. 213 and SEC v. W. J.
Howey Co.,214 the Court established the test for defining a security
that is still used today. Joiner, a 7-1 decision with Jackson writing
for the majority, refused to be cabined by traditional rules of statutory interpretation, dismissing them as "com[ing] down to us from
sources that were hostile toward the legislative process itself." 215
Jackson focused instead on the statute's "dominating general purpose."216 The Court looked to an instrument's character in commerce, noting that the "exploration enterprise was woven into
these leaseholds, in both an economic and legal sense. " 211
Howey, written by Murphy, digs deeper into the policy underlying the general term of investment contract, announcing a test
broader than Joiner's focus on speculation. W.J. Howey Co. solicited prospective investors, who were staying at a nearby resort that
Howey itself owned and operated. 218 The company offered narrow
212
Id. at 482. The government asserted that the defendant had given no testimony of
an incriminating nature and had offered a transcript to the court below, but Reed's
opinion insisted on a right to cross-examine with the transcript as part of a certified
record: "The refusal to permit the accused to prove his defense may prove trivial
when the facts are developed. Procedural errors often are. But procedure is the skeleton which forms and supports the whole structure of a case." Id.
213
320 U.S. 344 (1943). Douglas did not participate, which was his practice in all of
the securities cases to this point. Usually his file includes a brief memo from his secretary, Edith Walters (who had also been with Douglas at the SEC), describing the
SEC's involvement with the case. In this case, the memo relates that Orval Dubois
had reported that the present case had been opened quite recently and that there was
an earlier investigation, described as informal which never reached the Commission
and was closed by the staff in February 1936. Douglas had become a commissioner in
January of 1936. SEC Historical Summary of Chairman and Commissioners (Feb. 23,
2009), http://www.sec.gov/about/sechistoricalsummary.htm.
21
• 328 U.S. 293 (1946).
215
Joiner, 320 U.S. at 350.
210
Id. at 350-51.
217
Id. at 348. Later, Jackson returned to the importance of the enterprise in giving
an example about cemetery plots. "One's cemetery lot is not ordinarily thought of as
an investment and is most certainly real estate. But when such interests become the
subject of speculation in connection with the cemetery enterprise, courts have held
conveyances of these lots to be securities." Id. at 352 n.10.
218
Howey, 328 U.S. at 296.
2009]
Securities Law and the New Deal Justices
889
strips of land in orange tree groves as well as service contracts
(through its Howey-in-the-Hills affiliate) to service the land, collect
the oranges, and sell them at market. 219 The service contracts provided that the oranges would be pooled from all the strips of trees
for which there was a similar service agreement. Profits from the
pooled oranges then would be distributed to the various service
contract holders. 220 Despite the presence of some investors who
purchased only the land contract and not the service contract, the
Court framed the issue as whether the offers of orange grove and.
service contracts constituted offers of investment contracts and
therefore securities.221 In the course of concluding that that the
combination of land and services contracts was an investment contract, the Court announced what is now known as the Howey test:
(1) investment of money, (2) in a common enterprise, (3) expectation of profits, (4) from the efforts of another. 222 This test continues
to control the definition of an investment contract to this day.
Frankfurter found himself in dissent, siding with the lower courts
against a contrary agency argument. Noting that the district court
had found that the contracts were not a security, and that the finding had been affirmed by the court of appeals, Frankfurter invoked
"the wise rule of judicial administration under which this Court
does not upset concurrent findings of two lower courts in the ascertainment of facts and the relevant inferences to be drawn from
them." 223 This focus on deference to the lower courts did not persuade Frankfurter's colleagues; even Reed, who had voted with
Frankfurter at conference,224 ended up joining Murphy's majority
opinion. Frankfurter would level far more substantial criticism at
the SEC in Chenery and related cases discussed in the next section.
21
Id. at 295-96.
Id. at 299 ("They are offering an opportunity to contribute money and to share in
the profits of a large citrus fruit enterprise managed and partly owned by respondents.").
221
Interestingly, the focus on offers, rather than sales, a critical element of the analysis, was not in the draft that Murphy first circulated. See Memorandum from Justice
Frank Murphy to the Conference re no. 843-S.E.C. v. Howey Co. (May 17, 1946) (on
file with the Wiley Rutledge Collection, Library of Congress Box 141).
222
SEC v. W. J. Howey Co., 328 U.S. 293, 298-99 (1946).
223
Id. at 302 (Frankfurter, J., dissenting).
224
Conference Notes of Justice Harold Burton, SEC v. W. J. Howey Co. (undated)
(on file with the Harold Burton Collection, Library of Congress, Box 128).
•
220
890
Virginia Law Review
[Vol. 95:841
2. Anticlimactic Triumph: North American v. SEC
The Supreme Court finally upheld the constitutionality of the
SEC's power to break up public utility holding companies in 1946,
eleven years after the statute's enactment, and almost a decade after the Court's first PUHCA decision in Landis v. North American.225 By that point, doubts about the scope of the federal government's power under the commerce clause had disappeared, making
the Court's unanimous decisions in these cases mere afterthoughts.
SEC administrative decisions ordering the break up of the North
American and Electric Bond holding companies came down in
1942. The SEC's action in North American under Section ll(b)(l)
of the Act was affirmed by the Second Circuit in January of 1943
and the agency's action ordering dissolution of two Electric Bond
subsidiaries under Section ll(b )(2) of the Act was affirmed by the
First Circuit in March of 1944. The involvement of Justices Douglas, Reed, and Jackson in earlier PUHCA litigation before coming
to the Court (described in the prior section), along with the involvement of Chief Justice Stone's former firm in some of the
PUHCA litigation, prevented the Court from assembling the required six member quorum for many PUHCA cases until the 1945
term. Stone's decision to sit in the holding company cases to form a
quorum provoked conflict among the brethren. 226 Even then,
225
Landis v. N. Am. Co., 299 U.S. 248, 259 (1936).
"'See Sidney Fine, Frank Murphy: The Washington Years 250 (1984) ("When because of quorum problems in the 1943 term Stone stated in conference that he would
sit in a holding company case despite having previously disqualified himself in a similar case, Roberts exploded and said that 'he would write and tell the world about
Stone.' The chief justice 'turned white' and responded that no one would tell him in
what cases he should disqualify himself. Although it was 'a very embarrassing situation' for him, he was 'willing to be the goat' and to participate in the two cases .... ");
see also Alpheus Thomas Mason, Harlan Fiske Stone: Pillar of the Law 640-41 (1956)
("The Chief Justice was much disturbed that litigants, otherwise entitled to it, could
not have their day in Court. His concern grew as more cases involving features of the
holding company law were filed. Should not this consideration, he wondered, overbalance those that moved him initially to announce disqualification? As no former
law partner or client was present in these cases, he now saw no reason to disqualify
himself. When he broached the matter in conference, however, Justice Roberts objected to his sitting on the ground that similar issues were raised in all the cases, and
that if he were disqualified in the one, he ought not to sit in judgment on a related
case. Roberts' suggestion, apparently querying the Chief Justice's honor and implying
that he would discuss in an opinion the propriety of Stone's sitting, brought on a
heated debate. The accusation so angered the Chief that he had his clerk prepare a
2009]
Securities Law and the New Deal Justices
891
Stone's unexpected death, just three weeks after the North American decision was announced, but before the Electric Bond decision
was handed down, destroyed the fragile quorum for the second
case and sent it back for reargument the following fall. 221
When the North American v. SEC decision came down, it was an
enthusiastic validation of the SEC's power to break up utility holding companies. Justice Murphy wrote the decision, which focused
on the constitutional claims. 228 At this point in the Court's history,
the commerce clause question was easily dispatched; the "relationship to interstate commerce is so clear and definite as to make any
other conclusion unreasonable." 229 Murphy's opinion painted with a
broad, moralistic brush, noting that limits on the commerce clause
powers do not "render the nation powerless to defend itself against
economic forces that Congress decrees inimical or destructive of
the national economy." 230 It went directly at the "white collar" conduct as within the evil that government could pursue: "The fact
that an evil may involve a corporation's financial practices, its
business structure or its security portfolio does not detract from the
memorandum of cases on which Roberts had sat although his old firm or former clients were involved." (footnotes omitted)).
221
See Letter from Justice Frank Murphy to Chief Justice Fred Vinson (October 9,
1946) (on file with the Frank Murphy Collection, University of Michigan) ("I had finished most of the work on the Engineers Public Service and the American Power &
Light-Electric Power & Light opinions and was about ready to circulate them when,
unfortunately, the good Chief Justice died, destroying the necessary quorum."). The
Engineers Public Service case was eventually dismissed as moot. Eng'rs Pub. Serv. Co.
v. SEC, 332 U.S. 788, 788 (1947).
228
N. Am. Co. v. SEC, 327 U.S. 686 (1946). Justices Douglas, Jackson and Reed did
not participate. Id. at 711. Frankfurter wrote Reed during the time when the quorum
problem remained unresolved:
[Y]ou are right in not sitting in the North American case .... I also know that
the people who were eager to have you sit were not moved by the considerations that should move a court. They counted on your deciding their way, which
is precisely the reason why the other side would have had a just grievance. And
you do not alleviate a grievance by showing that similar grievances that others
might have had in the past were equally disregarded. Nor are feelings of injustice rendered unreasonable by having those who inflict them tell those who feel
them they are really quite unreasonable in feeling them. That psychological fact
is, I believe, at the core of the labor problem as it is of the race problem.
Letter from Justice Felix Frankfurter to Justice Stanley Reed (Mar. 27, 1944) (on file
with the Felix Frankfurter Collection, Harvard Law School Library, Reel 56).
22
• N. Am. Co., 327 U.S. at 703.
230
Id. at 705.
892
Virginia Law Review
[Vol. 95:841
power of Congress under the commerce clause to promulgate rules
in order to destroy that evil. " 231
The easy constitutional victory of 1946 should not obscure the
challenge posed in 1935 and 1936. At that time, securing the Supreme Court's assent to an expert administrative agency's radical
transformation of an American industry was highly uncertain. The
administration's strategy "to postpone review ... and to increase
the chance that the test cases would be heard by a more receptive
Supreme Court" 232 succeeded; the role of the SEC in regulating the
financial community was assured. The question that remained was
how much discretion the Court would afford the SEC; we explore
that topic in the next section.
Ill. TENSION AMIDST TRIUMPH
As we have seen, by 1940 Roosevelt had succeeded in appointing a majority of Justices to the Court who shared his views on the
need for governmental control over business. Given the role that
the nominees had played in the front lines of the battle for regulatory supremacy over capitalism, it is hardly surprising that they
consistently upheld the constitutional power of the federal gov. .
ernment to regulate, not only the capital markets, but business
generally.
Although the hurdle of constitutionality had been overcome, it
remained for the Court to work out the relationship between law
(and implicitly, courts) and administration (that is, the SEC).
Would the Roosevelt Court defer to the SEC's expertise, or would
it constrain administrative discretion through narrow interpretations of the statutes that gave the SEC its authority? Should the
SEC be able to proceed through case-by-case enforcement, which
would afford the agency maximum flexibility, or should it have to
regulate through rulemaking, giving business prospective notice of
the rules of the game? The answer to these questions had important implications, not just for securities law, but also for the legal
foundations of the New Deal. Would the administrative state be
the rule of experts, or would judges play the dominant role?
231
Id. at 706. Murphy similarly disposed of the due process clause claim, permitting
Congress to balance the various considerations. Id. at 708.
232
Fassett, supra note 140, at 66.
2009]
Securities Law and the New Deal Justices
893
In between U.S. Realty in 1940, the Court's first securities case in
which the Roosevelt appointees gave the government a majority,
and the Court's unanimous upholding of the constitutionality of
PUHCA in North American in 1946, which represented the complete triumph of administrative power, fissures began to develop
along the fault line between experts and judges. Frankfurter the
professor had bitterly criticized the interventions of the Supreme
Court into state regulatory efforts,233 but Frankfurter the Justice
was much less willing to defer to the SEC. Beginning in the early
1940s, Frankfurter parted company with the more progressive vision of his fellow New Deal appointees, who were more willing to
trust administrative expertise. The dispute was sometimes phrased
as respect for administrative processes and sometimes as a respect
for the trial court, but whatever the formulation, Frankfurter-who
had been expected to be "the leader of the liberal wing" of the
Court234-found himself increasingly isolated from what he perceived as a politically motivated coalition led by Black and Douglas.235
233
See Reuel E. Schiller, The Era of Deference: Courts, Expertise, and the Emergence of New Deal Administrative Law, 106 Mich. L. Rev. 399, 417-21 (2007) (describing Professor Frankfurter's views on the need for judicial deference to administrative experts). There are suggestions in Frankfurter's writing, however, of the
importance that he placed on judicial review of agency action. Frankfurter laid the
blame for the evils of the industry with the investment bankers. Felix Frankfurter, supra note 100, at 157-58 ("[T]he power which must more and more be lodged in administrative experts, like all power, is prone to abuse unless its exercise is properly
circumscribed and zealously scrutinized. For we have greatly widened the field of administrative discretion and thus opened the doors to arbitrariness.").
234
Rauh, supra note 29, at 64 ("When Felix went on the bench in January 1939 he
had such stature as a professor, and adviser to Presidents, an articulate writer, and a
liberal that he was assumed to be the leader of the liberal wing.").
235
The split-and Frankfurter's eroding influence-may have had its roots in other
areas. The first tensions in the New Deal bloc began to surface in the Flag Salute
cases. In the first of these cases, Minersville School District v. Gobitis, 310 U.S. 586,
600 (1940), Frankfurter wrote for an eight-Justice majority upholding a Pennsylvania
law requiring school children to salute the American flag. Soon thereafter, however,
Frankfurter felt his leadership position slipping away. Hirsch, supra note 17, at 155.
This unexpected development embittered him: by the end of the 1942 term, Frankfurter had the
sense of being under siege. Unexpectedly, he found himself in a position of being in opposition; his leadership had been rejected. He would react in a manner
that had become a familiar part of his psychological makeup. The reaction
would be particularly bitter, for this time his opponents were former allies; the
894
Virginia Law Review
[Vol. 95:841
A. The Rule of Experts vs. Judicial Review
The split between Frankfurter and his progressive colleagues in
the field of securities law is most dramatically seen in the two
Chenery decisions, now bedrocks of administrative law. The first
came to the Supreme Court in the fall of 1942. Chenery /, 236 with
Frankfurter writing for a slim majority, marked the SEC's first significant setback in the Supreme Court since Jones. 231 The case is
also notable as the Court's first brush with insider trading under
the federal securities laws. By looking to the common law as the
basis for any insider trading ban, it foreshadows the Court's forays
a generation later into the question of insider trading, when it
again relied on common law concepts of fiduciary duty and fraud. 238
challenge was in a domain where he had every reason to anticipate complete
success; and he had no choice but to remain where he was and fight it out.
Id. at 176. The erosion of his influence became quite obvious when Gobitis was overruled only three years after being handed down by West Virginia State Board of Education v. Barnette, 319 U.S. 624 (1943). Frankfurter was angered by the switch of
Black, Douglas, and Murphy and appalled by what he saw as their political motivation. Edward F. Prichard, Jr., Clerks of the Court on the Justices, in The Making of
the New Deal: The Insiders Speak, supra note 29, at 47-71 ("Frankfurter .... had
great contempt for Murphy, Black, and Douglas, because they voted with him in the
first case and then changed their minds. He always said he didn't believe they had reread the Constitution, they had just read the newspapers."); Rauh, supra note 29, at
64 ("When Frankfurter asked Douglas whether Hugo Black had any new insight into
the case, Douglas said, 'No, but he's read the papers.' Felix thought that was terrible!"). Whatever motivated the Progressive trio to switch, Frankfurter's leadership
role on the Court had quite publicly disappeared with the Flag Salute cases. See
Hirsch, supra note 17, at 155 ("The term that began the fall of 1941 was a turning
point. The liberal trio solidified in its opposition to Frankfurter, and personnel
changes brought a new unsettledness to inter-Court relations. Suddenly, Frankfurter
found himself watching a calm Court, amenable to his influence and leadership, slip
away from him.").
236
SEC v. Chenery Corp. (Chenery I), 318 U.S. 80 (1943).
237
The vote was 4-3 with Jackson, Roberts and Stone joining Frankfurter's majority;
Douglas was not participating as usual and Rutledge had not yet taken Byrnes' seat.
238
See generally A.C. Pritchard, United States v. O'Hagan: Agency Law and Justice
Powell's Legacy for the Law of Insider Trading, 78 B.U. L. Rev. 13 (1998) (detailing
Powell's reliance on common law concepts in insider trading cases). Jackson, in a letter to Frankfurter two days before the decision was released, suggested that the insider trading may well have helped the shareholders, a view that was also to appear in
later debates about insider trading. He argued that "if, as is frequently the case, they
were selling under compulsion, the bids of these directors may well have sustained
their market, and they may well have benefited therefrom as against the terms they
must have accepted in the absence of such bids." Letter from Justice Robert H. Jack-
2009]
Securities Law and the New Deal Justices
895
The alleged insider traders were officers, directors, and controlling stockholders of the Federal Water Service Corporation, who
had acquired preferred stock in Federal during the course of a
PUHCA reorganization. 239 As Frankfurter characterized the rule of
decision applied by the SEC, "respondents, as Federal's managers,
were fiduciaries and hence under a 'duty of fair dealing' not to
trade in the securities of the corporation while plans for its reorganization were before the Commission." 240 As a sanction for the
violation of that duty, the SEC refused· to approve a plan put forward by the company that called for their preferred stock to be
converted into common stock in the reorganized entity, thus depriving the managers of their gains from trading. 241
The SEC's invocation of the term "fiduciary" provoked a now
well known lecture from Frankfurter on legal reasoning:
But to say that a man is a fiduciary only begins analysis; it gives
direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed
to discharge those obligations? And what are the consequences
of his deviation from duty? 242
Frankfurter, of course, knew the answers to these questions; the
SEC had failed in its analysis. Frankfurter did not need to defer to
the SEC as the expert on questions of corporate and securities law;
he was the expert! In Frankfurter's view, an important principle of
administrative law was at stake: the agency needed to be forthright
with respect to the basis of its determination in order for the court
to discharge its review function. 243 Here the SEC made a strategic
error: it had not found that the insiders "acted covertly or traded
on inside knowledge," but nonetheless found that they had violated "broad equitable principles" recognized in earlier judicial decisions.244 Its reliance on earlier judicial decisions meant that it
son to Justice Felix Frankfurter (Jan. 30, 1943) (on file with the Felix Frankfurter Collection, Harvard Law School Library, Part 1, Reel 7).
239
Chenery I, 318 U.S. at 81-82.
240
Id. at 85.
241 Id.
242
Id. at 85-86.
243
This is clearly set out in Frankfurter's exchange with Reed just prior to the issuance of the Chenery I decision. See infra notes 252-261 and accompanying text.
244
Chenery I, 318 U.S. at 86-87.
896
Virginia Law Review
[Vol. 95:841
could also be constrained by those decisions, which Frankfurter
then proceeded to distinguish as inapposite.
The SEC would not necessarily be bound by these precedents,
Frankfurter conceded, had the agency promulgated new rules reflecting its experience gained in working with the statute: "Congress certainly did not mean to preclude the formulation by the
Commission of standards expressing a more sensitive regard for
what is right and what is wrong than those prevalent at the time the
Public Utility Holding Company Act of 1935 became law." 245 But
having "professed to decide that case before it according to settled
judicial doctrines, its action must be judged by [those] standards .... " 246 Having dismantled the Commission's reasoning derived from fiduciary duty, Frankfurter blocked any rescue based on
judicially supplied alternatives by announcing the bedrock principle for which Chenery I is known in administrative law: "[A]n administrative order cannot be upheld unless the grounds upon which
the agency acted in exercising its powers were those upon which its
action can be sustained. " 247
Frankfurter's opinion broached another core issue of administrative law in suggesting an agency would be afforded greater free245
Id. at 89. Indeed, Frankfurter favored more demanding standards for fiduciaries.
See Felix Frankfurter, Social Issues before the Supreme Court (1933), reprinted in
Law and Politics: Occasional Papers of Felix Frankfurter, supra note 138, at 48, 50
("[T]he law must become more sophisticated in its conception of trustees' obligations.
It must sharpen and extend the duties incident to the fiduciary relations of corporate
directors and officers.").
246
Chenery I, 318 U.S. at 89.
247
Id. at 95. For a discussion of this principle and the explanations that have been
given for it, see Kevin M. Stack, The Constitutional Foundations of Chenery, 116 Yale
L.J. 952 (2007) (arguing that Chenery I is best explained by the nondelegation doctrine). This bedrock principle of administrative law may not have had the strongest of
foundations. Jackson, the fourth vote in a 4-3 decision, had written a draft concurrence in which he said, "where the administrative order depends upon legal grounds I
should think it our duty to sustain an order that is right on correct legal principles
even if the administrative body has assigned incorrect ones." Draft Concurrence of
Justice Jackson, SEC v. Chenery Corp., No. 254, October Term, 1942, at 1 (on file
with the Papers of Robert H. Jackson, Library of Congress, Box 126). Nevertheless,
Jackson joined the four-Justice majority without a separate concurrence.
Jackson's more fundamental legal point in the draft concurrence was that the SE C's
order was unsustainable because the insiders had not received notice that their conduct was illegal: "Surprise law is sometimes inevitable, but it seems almost bromidic
to say that citizens are entitled to have some way of learning the general principles
that they will suffer in person or property for transgressing." Id. at 6.
2009]
Securities Law and the New Deal Justices
897
dom in rulemaking than in formal adjudication. He suggested a
willingness to defer to the SEC's "experience and insight" accumulated through its involvement in reorganization proceedings, but
hinted that deference would only be given if the SEC "promulgated a general rule" proscribing the conduct in question. 248 Indeed,
in an earlier draft of the opinion, Frankfurter had gone further to
suggest that deference to the agency rule-making authority required the invalidation of its administrative order if it had not previously adopted a rule. 249
Here was the dividing line between Frankfurter and his more
liberal colleagues. Black's dissent, joined by Murphy and Reed, rejected "[t]he intimation ... that the Commission can act only
248
Chenery I, 318 U.S. at 92. Chief Justice Stone suggested a more explicit endorsement of rulemaking by the SEC was in order. Handwritten Note from Chief Justice
Harlan Fiske Stone to Justice Felix Frankfurter (undated) (on file with the Felix
Frankfurter Collection, Harvard Law School Library, Part 1, Reel 7). Frankfurter
demurred:
Of course I agree with you that had the SEC summarized their experience by
putting the specific ruling in the Chenery case into a generalized rule, a totally
different situation would have been created. But I thought it wiser to indicate
that by innuendo rather than explicitly. To do the latter might be read by the
Commission as a broad hint from us to issue a regulation. Thereby we would be
stimulating new problems.
Letter from Justice Felix Frankfurter to Chief Justice Harlan Fiske Stone (Jan. 23,
1943) (on file with the Felix Frankfurter Collection, Harvard Law School Library,
Part 1, Reel 7).
249
Draft Opinion, SEC v. Chenery Corp., at 8-9 (undated) (on file with the Hugo
Black Papers, Library of Congress, Box 270) ("But whether it is 'necessary or appropriate in the public interest or for the protection of investors or consumers' that a
general rule or regulation be adopted to prohibit reorganization managers from participating equally with others with respect to stock acquired by them during the
course of the reorganization is for the Commission to determine. Where an administrative order is valid only if it rests upon a determination which the agency alone is
authorized to make, its failure to make such a determination cannot be remedied by
the fact that the agency might properly have made such a determination. It is not for
us to determine independently what is 'detrimental to the public interest or the interest of investors or consumers' or 'fair and equitable' within the meaning of §§ 7 and
11 of the Public Utility Holding Company Act of 1935.").
In his final opinion, Frankfurter merely asserted that,
[B]efore transactions otherwise legal can be outlawed or denied their usual
business consequences, they must fall under the ban of some standards of conduct prescribed by an agency of government authorized to prescribe such standards--either the courts or Congress or an agency to which Congress has delegated its authority.
Chenery I, 318 U.S. at 92-93.
898
Virginia Law Review
(Vol. 95:841
through general formulae rigidly adhered to." 250 In Black's view,
PUHCA gave the SEC "wide powers to evolve policy standards,
and this may well be done case by case."251 Black's position would
prevail in Chenery II and give rise to a second bedrock principle of
administrative law.
Frankfurter's commitment to judicial review was diametrically
opposed by Black's commitment to administrative discretion.
Frankfurter's difference with the dissenters is more starkly visible
in correspondence between Frankfurter and Reed leading up to issuance of majority and minority opinions. Frankfurter had been
courting Reed since his appointment to the Court-with some success252-but Frankfurter could not hold back his impatience with
Reed for having joined Black's opinion.
Were I still at Cambridge I would be saddened to note that you
underwrote an opinion like Black's dissent in the Chenery case. I
don't think I should be less saddened because I am your colleague. I hate to see you "bogged down in the quagmire" of
Populist rhetoric unrelated to fact. 253
This condescending introduction-so typical of Frankfurter in
his relations with his colleagues-was merely the preface of an extended explication by Frankfurter on the distinction between the
fiduciary duties of corporate directors and trustees and, more importantly, Frankfurter's views on administrative law. Frankfurter
conceded that the SEC had the authority to depart from the common law rule, but in his view, the agency "made the purest kind of
an ad hoc decision without any reason whatever for its conclusion
except that these respondents were reorganization managers." 254
The Commission's conclusion "affords no possible basis for a reviewing court to say that that which the Commission did was right.
And so the case must be remanded to the Commission unless court
review simply means rubber stamping what the Commission
°Chenery I, 318 U.S. at 99 (Black, J., dissenting).
25
251
Id. at 100.
See Fassett, supra note 140, at 347 (noting that, over the course of the 1942 and
1943 terms, Reed voted most frequently with Frankfurter).
253
Letter from Justice Felix Frankfurter to Justice Stanley Reed, at 1 (Jan. 29, 1943)
(on file with the Felix Frankfurter Collection, Harvard Law School Library, Part 1,
Reel 7).
254
Id. at 2.
12
2.
2009]
Securities Law and the New Deal Justices
899
does." 255 Frankfurter urged that the standards he expected from the
SEC and other administrative agencies were essential to their long
term viability:
Administrative agencies have two major functions. They exercise
delegated legislation through their rule-making power, that is,
they formulate general standards of conduct based on their experience and their expertness. The broadest leeway should be
given to them in the exercise of this legislative function. Secondly, they exercise an adjudicatory function in disposing of specific controversies that come before them, much as courts would
do if the jurisdiction in these matters were given to them. The
Chenery case is such an exercise of the administrative adjudicatory process. And it is subject, therefore, to the requirement that
the reviewing courts be enabled to know the basis of the determination of the administrative [sic] in order to discharge the
court's function of review. I have spent most of my professional
life in trying to get recognition for the indispensability of the administrative process. I do not want slipshodness and, still worse,
lust for power[, to] lead to curtailment of these administrative
powers by determinations without reason or by appeals to rules
of law for which there is no warrant. 256
Frankfurter believed passionately in the administrative statebut he was equally fervent in his belief that the rule of law must
apply to administrative agencies. Those values would be enforced
by judges, if necessary. Frankfurter had devoted much of his career
to arguing for the proposition that courts should not rely on the
Constitution to interfere with economic regulation by legislatures.257 He did not equally believe in judicial restraint, however,
when it came to holding administrative agencies to statutory standards. They were required to follow the rules set down for them by
the legislature.
2.1i
116
117
Id. at 3.
Id. at 3-4.
See Felix Frankfurter, Does Law Obstruct Government?, in The Public & Its
Government, supra note 100, at 36, 47 (expressing dismay at Supreme Court's increasing tendency to strike down economic regulation: "And always by a divided Court,
always over the protest of its most distinguished minds!").
900
Virginia Law Review
[Vol. 95:841
Frankfurter's positioning of himself as the defender of the rule
of law was calculated to annoy his colleagues. Reed by this time
had grown tired of the professor's lectures and he believed that
agencies should be given much broader latitude. In his reply, Reed
argued that "[y]ou [Frankfurter] say the Commission from its experience may fashion a new 'general' rule of conduct. I say, it has
done just that. ... [I]t said that fiduciary reorganization managers
may not deal in stock of companies being reorganized." 258 In Reed's
view, the SEC was not required to promulgate a formal rule: "A
few such ad hoc decisions will result in a regulation-that is the
way regulations grow." 259 Reed was content to leave the SEC considerable space in which to grow its regulations:
Every decision must be an ad hoc ruling, as I see it. An application of the Commission's idea as to "fair and equitable." Such
application should be guided by precedents and regulations but
may depart from them. If it does not go too far (arbitrary, capricious and unreasonable), it should be upheld. This is the essence
of administrative law. 260
Reed's incremental vision of administrative lawmaking, in stark
contrast to Frankfurter's, required very little involvement from
courts; indeed, it mirrored the rulemaking process of common law
courts. Reed's position was the one that would ultimately prevail in
the New Deal Court's approach to securities law. 261
In between the time Chenery was remanded to the SEC in 1943
and its return in 1946, the divisions that had begun to develop
among the Justices had devolved into open warfare. Jurisprudential differences were now exacerbated by intense personal animosity. The tensions on the Court flared with the retirement of Roberts in the summer of 1945. Black refused to sign the customary
258
Letter from Justice Stanley Reed to Justice Felix Frankfurter (Jan. 29, 1943) (on
file with the Felix Frankfurter Collection, Harvard Law School Library, Part 1, Reel
7).
25• Id.
200 Id.
261
The SEC, for its part, ameliorated some of the surprise element of its pronouncements by making liberal use of informal guidance, a practice that has developed into its current "No Action" letters. See Thomas K. McCraw, Prophets of Regulation 215 (1984) (discussing the SEC's use of General Counsel opinions to elucidate
its views on the securities laws).
2009]
Securities Law and the New Deal Justices
901
letter from the Justices thanking him for his services, and Stone's
best efforts were unable to broker a compromise.262 The result was
a very ungracious departure for the last of the old guard.
These resentments spilled into public view when Chief Justice
Stone died on April 22, 1946. Five of the sitting associate Justices
would have been delighted to be elevated to the center seat,263 with
Douglas actively campaigning for the seat (and Corcoran assisting
behind the scenes).264 Black and Jackson, however, were the primary contenders, with Jackson having been promised the spot by
Roosevelt before his death. 265 The Washington scuttlebutt was that
neither would be willing to serve under the other. 266 Moreover,
Drew Pearson wrote in his prominent column that two members of
the Court (implicitly, Black and Douglas), had threatened to resign
if Jackson were made Chief Justice. 267 In an effort to avoid the
ramifications of choosing between Black and Jackson, Truman instead appointed his Secretary of the Treasury, Fred Vinson. Truman's desire to keep the peace on the Court was not entirely successful; Jackson, bitter at having been passed over, sent a cable to
the President and letters to the congressional judiciary committees
denouncing Black for having declined to recuse himself in a case
involving a former law partner.268
Thus, it was a Court with extremely frayed personal relations
that heard Chenery when the case returned in the October 1946
term. The SEC had responded to the Court's earlier remand by
reaching the same result, basing it on a different rationale. Frankfurter complained to Black:
With every impulse to sustain the Commission, ... I cannot escape the conviction that the Commission has decided this case ad
262
Barry Cushman, Lost Fidelities, 41 Wm. & Mary L. Rev. 95, 98 (1999).
Fassett, supra note 140, at 405 (noting that, on Stone's death, "it is quite clear that
five of the associate justices each seriously aspired to, or at least would wholeheartedly have welcomed, becoming chief justice").
264
See Ferren, supra note 91, at 326.
265
See id. at 325.
266
Murphy, supra note 127, at 244.
261 Id.
268
Cable from Justice Robert H. Jackson to President Harry Truman (June 8, 1946),
discussed in Melvin I. Urofsky, Division and Discord: The Supreme Court Under
Stone and Vinson 1941-1953, at 143-44 (1997). The case was Jewel Ridge Coal Corp.
v. Local No. 6167, United Mine Workers of Am., 325 U.S.161 (1945).
263
902
Virginia Law Review
[Vol. 95:841
hoc without any reference to considerations that would govern it
in the same case tomorrow....
. . . The SEC is not a Kadi sitting under a tree, dispensing
judgment in each case, unrelated to general considerations. 269
Chenery I presented two possible separate strands of administrative law and judicial review. One focused on the importance of the
courts being able to review the reasons stated by an administrative
agency in an adjudication; the other suggested administrative action done by rule-making would enjoy less intrusive judicial review.
Chenery I was ambiguous as to which administrative law message
would control going forward. 210
In Chenery II, Murphy, Black, and Reed, who had dissented in
Chenery I, were now joined by new Justices Wiley Rutledge and
Harold Burton to form a majority upholding the SEC's action. This
majority explicitly rejected Frankfurter's suggestion in Chenery I
that the agency should proceed by rulemaking: "[T]he choice made
between proceeding by general rule or by individual, ad hoc litigation is one that lies primarily in the informed discretion of the administrative agency" 211-a holding that endures as a core principle
of modern administrative law. Only Jackson joined Frankfurter in
voting to overturn the SEC's decision. 212 The Court was now committed to deference to agency discretion; Frankfurter's concerns
about judicial review of the agency performing an adjudicatory
function were brushed aside.
Frankfurter circulated a dissent that threatened another public
blow-up. The case was argued in December and assigned to Burton, but it was reassigned to Murphy in early June 273 because Burton had not been able to produce an opinion and Murphy had
269
Letter from Justice Felix Frankfurter to Justice Hugo Black (Dec. 23, 1946) (on
file with the Robert Jackson Collection, Library of Congress, Box 138). The "Kadi"
reference made its way into a published dissent a few years later. See Terminiello v.
Chicago, 337 U.S. 1, 11 (1949) (Frankfurter, J., dissenting) ("This is a court of review,
not a tribunal unbounded by rules. We do not sit like a kadi under a tree dispensing
justice according to considerations of individual expediency.").
270
We thank Kevin Stack for pointing out this difference.
271
SEC v. Chenery Corp. (Chenery II), 332 U.S. 194, 203 (1947).
272
Douglas, as usual, had recused himself. Chief Justice Vinson did not participate.
Id. at 209.
273
James E. St. Clair & Linda C. Gugin, Chief Justice Fred M. Vinson of Kentucky:
A Political Biography 180 (2002).
2009]
Securities Law and the New Deal Justices
903
completed all of his opinions for the term.274 Murphy's law clerk
scrambled to draft an opinion in about a week's time. 275 Frankfurter
did not have time for a full-blown dissent at that late point in the
term, so he circulated a draft dissent: "The Court's opinion in this
case was not circulated until Tuesday, June 17th. Obviously that
precluded opportunity before adjournment for the preparation,
printing, circulation and consideration by the whole Court of a response adequate to the issues raised by the opinion."276 Frankfurter's inartful choice of language provoked a gentle scolding from
Rutledge for "disclos[ing] the confidential routines of the Court."277
Moreover, Rutledge felt that Frankfurter's opinion put Murphy in
a bad light: "[Murphy] will appear, if your circulation goes down, in
the light of having caused all the delay. I do not think [that] implication is fair ... ."218 Frankfurter responded by deleting the reference to the date of circulation, instead attributing his failure to
publish a full dissent to the "unavoidable lateness of the decision. "279 Frankfurter's second choice of words fared little better,
provoking an angry response from Murphy:
I am asking Justice Frankfurter to delete all reference in his remarks to the "unavoidable lateness of the decision in this case."
So far as the public is concerned, any decision rendered in the
same term as that in which the case is argued is not "unavoidably" late. It is not unknown for cases to be argued early and decided late in the term. To say that such a decision is "unavoid274
Telephone Interview with Eugene Gressman, Law Clerk to Justice Frank Murphv 1943-48 (Sept. 6, 2008) (notes on file with the authors).
2,i Id.
276
Justice Felix Frankfurter, Memorandum to the Conference in Nos. 81 and 82,
Oct. Term, 1946 (June 23, 1947) (on file with the Hugo Black Collection, Library of
Congress, Box 283).
277
Letter from Justice Wiley Rutledge to Justice Felix Frankfurter (June 18, 1947)
(on file with the Felix Frankfurter Collection, Harvard Law School Library, Part 3,
Reel 3).
278
Id. Rutledge was sufficiently distressed by Frankfurter's opinion that he wrote a
draft concurrence exonerating Murphy of any blame for the lateness of the opinion.
Draft Concurrence of Justice Rutledge, SEC v. Chenery Corp., Nos. 81 and 82, Oct.
Term, 1946 (June 23, 1947) (on file with the Wiley Rutledge Collection, Library of
Congress, Box 155).
279
Justice Felix Frankfurter, Memorandum to the Conference in Nos. 81 and 82
(June 18, 1947) (on file with the Wiley Rutledge Collection, Library of Congress, Box
155).
904
Virginia Law Review
[Vol. 95:841
ably" late is thus to stir up needless speculation and comment by
the public. 280
A chastised Frankfurter attempted to apologize:
It must be due to naivete that it never occurred to me that the
simple statement of an obvious fact could ever be deemed a departure, however remote, from the Court's tradition, or that it
would touch anybody's sensitiveness ....
I am sorry even if unwittingly I should have touched the sensibilities of any of my brethren. In any event, long before the
memorandum by brother Murphy reached me, I sent a revised
phrasing of my notice of dissent to the printer. It says precisely
what I believe it is appropriate to say, and says it in a way that
does not, so far as I am able to judge, lend itself even to tortured
• •
•
281
m1smterpretation.
Frankfurter had a rare gift, allowing him to offend-with his reference to "tortured misinterpretation"-even in the course of an attempted apology. His actual opinion, however, was inoffensive. 282
It was Jackson, however, who took on the task of writing the full
dissent for Frankfurter and himself. His dissent is a sarcastic attack
(characterized by Frankfurter as a "rip-snorter" 283 ) on the Court's
reasoning and the SEC's lawlessness. "The Court's reasoning adds
up to this: The Commission must be sustained because of its accumulated experience in solving a problem with which it had never
before been confronted!" 284 Jackson's strident tone provoked an
anxious memorandum from Vinson's law clerk, who worried that
"it includes such ridicule of the majority position as possibly to intimate lack of integrity when applied to the product of able
minds .... In view of publicity recently given to 'feuds' within the
280
Justice Frank Murphy, Memorandum to the Conference (June 18, 1947) (on file
with the Hugo Black Collection, Library of Congress, Box 283).
281
Justice Felix Frankfurter, Memorandum for the Conference Nos. 81 and 82 (June
18, 1947) (on file with the Hugo Black Collection, Library of Congress, Box 281).
282
Letter from Justice Frank Murphy to Justice Felix Frankfurter (June 18, 1947)
(on file with the Felix Frankfurter Collection, Harvard Law School Library, Part 1,
Reel 17) ("Thanks for your last circulation in the Chenery case. It is entirely satisfactory to me now.").
283
Letter from Justice Felix Frankfurter to Justice Robert H. Jackson (July 23,
(1947)) (on file with the Robert Jackson Collection, Library of Congress, Box 138).
284
SEC v. Chenery Corp., 332 U.S. 194, 213 (1947) (Jackson, J., dissenting).
2009]
Securities Law and the New Deal Justices
905
Court, I think the opinion may invite newspaper attention .... " 285
The clerk's concern was justified; the newspaper headlines read
"Jackson Says High Court Encourages Lawlessness." 286
Jackson scored polemical points, but Frankfurter passed up an
opportunity to flesh out his vision of the rule of law in the administrative state. In the months before Chenery II was decided, Congress finally passed the Administrative Procedure Act, a project
long delayed because of the war effort, and in doing provided a
partial response to Frankfurter's earlier concerns. The new statute
imposed additional requirements of "substantial evidence" and judicial restraint of "arbitrary" and "capricious" actions, 287 and
sought to reverse what Congress may have perceived as "overly
deferential judicial examination of agency factfinding." 288 The Act
itself reflected something of a political compromise,289 with the
most restrictive and detailed provisions applicable to formal adjudications, leaving rulemaking with less intrusive and vague provisions.290 Over time administrative law would move further in Frankfurter's direction. Judicial deference to administrative expertise
may have already begun to recede from its high point by the time
285
Memo on dissenting opinion in S.E.C. v. Chenery from JT to Chief Justice Fred
Vinson (Oct. 4, 1947) (on file with the Fred Vinson Collection, University of Kentucky).
286
Jackson Says High Court Encourages Lawlessness, Minneapolis Morning Tribune, Oct. 7, 1947, at 2 (newspaper clipping on file with the Robert Jackson Collection,
Library of Congress, Box 138).
m See generally Administrative Procedure Act, 5 U.S.C. §§ 551-59, 701--06 (2000).
288
M. Elizabeth Magill, Agency Choice of Policymaking Form, 71 U. Chi. L. Rev.
1383, 1427 (2004).
289
On the long struggle by conservatives to rein in the New Deal agencies, see
George B. Shepherd, Fierce Compromise: The Administrative Procedure Act
Emerges from New Deal Politics, 90 Nw. U. L. Rev. 1557 (1996).
290
Lisa Schultz Bressman, Procedures as Politics in Administrative Law, 107 Col um.
L. Rev. 1749, 1756 (2007) (describing how "New Deal Democrats fought to unleash
agencies from rigid procedural control, while Republicans pushed in the opposite direction, particularly in the context of adjudication, which was a prevalent form of
agency decisionmaking at the time").
906
Virginia Law Review
[Vol. 95:841
of Chenery Il. 291 At no point, however, would the Court require an
agency to proceed through rulemaking. 292
A similar division over the intensity of judicial review of SEC action is visible in two other decisions of this period (and one nondecision). Otis & Co. v. SEC, 293 decided between the two Chenery
cases, arose from the liquidation of a holding company in which the
SEC declined to apply a liquidation preference for preferred
shareholders contained in the holding company's charter. Applying
the preference would have had the effect of giving all of the equity
to the preferred shareholders and excluding the common shareholders entirely. 294 In deciding whether such a result was "fair and
equitable," as required by PUHCA Section 11(e ), Frankfurter focused on the Court's prior insistence in a bankruptcy proceeding
that violations of the absolute priority rule among securities holders were unfair and inequitable. 295 As Frankfurter pointed out in a
letter to Reed, there was little reason for construing the identical
language "fair and equitable" one way for the Bankruptcy Act,
adopted in 1934, and another way for PUHCA, adopted in 1935.296
Chief Justice Stone argued at the Court's conference that affirming
the SEC would be tantamount to saying that the "Commission is
291
See Schiller, supra note 233, at 441 ("The profound deference of New Deal-era
administrative law was not to last Jong, but it firmly defined the role of expertise in
the administrative state and created the model of judicial deference that would be
both emulated and reacted against as administrative law developed during the rest of
the twentieth century." (footnote omitted)).
292
The bedrock holding of Chenery II as to agency choice would come into question
after one point after Frankfurter's retirement. NLRB v. Wyman-Gordon, 394 U.S.
759 (1969), suggested "that a doctrine policing agency choice of procedure might be
on the horizon," Magill, supra note 288 at 1407, but as Professor Magill has developed, the doctrine thereafter evolved to emphasize the breadth of an agency's discretion to choose between rulemaking and adjudication. See generally id.
293
323 U.S. 624 (1945). The preference purported to apply to "liquidation of the
corporation, whether voluntary or involuntary." Id. at 630 n.6 (quoting the United
Li~ht and Power Company's charter).
Id. The SEC chose instead to value the preferred stock on a going concern basis
and awarded a small percentage of the value of the liquidated company to the common stockholders. Id. at 629-32.
295
Case v. Los Angeles Lumber Co., 308 U.S. 106, 114-16 (1939); see also Consol.
Rock Prod. Co. v. DuBois, 312 U.S. 510, 530-31 (1941).
296
Letter from Justice Felix Frankfurter to Justice Stanley Reed (Nov. 21, 1944) (on
file with the Felix Frankfurter Collection, Library of Congress, Reel 56).
2009]
Securities Law and the New Deal Justices
907
God." 297 A majority of the Court was persuaded by the SEC's arguments, however, with Stone, Roberts, and Frankfurter dissenting. The Court majority was giving the SEC a clean slate, unencumbered by judicial interpretations of analogous laws. It also
established a pattern of affording the SEC latitude in valuing the
interests of securities holders in holding company reorganizations.298
American Power II, decided in 1946, reflected both the Court's
unanimity on questions of constitutional power discussed in the last
section and its division on the question of judicial review of expert
decisions. 299 Not surprisingly, Murphy's opinion for the Court in
American Power II tracked his North American opinion of a few
months earlier with respect to the commerce clause and due process challenges. The Court concluded that "the federal commerce
power is as broad as the economic needs of the nation. "300 Implicit
in this holding was that it was Congress-not the Court-that
297
Handwritten Notes from Conference, No. 81, OT 1944 (undated) (on file with the
Frank Murphy Collection, Bentley Library, University of Michigan, Reel 131).
298
In SEC v. Cent. Ill. Sec. Corp., 338 U.S. 96, 155 (1949), the Justices were unanimous (with Douglas and Jackson not participating) in deferring to the SEC's choice to
award preferred shareholders the call value of their securities rather than their involuntary liquidation value. The Court characterized the "principle of the Otis case ...
that the measure of equitable equivalence for purposes of simplification proceedings
compelled by the Holding Company Act is the value of the securities 'on the basis of
a going business and not as though a liquidation were taking place."' Id. at 131 (citation omitted).
Niagara Hudson Power Corp. v. Leventritt, 340 U.S. 336 (1951), represents the
complete triumph of administrative expertise over the wisdom of the marketplace.
There, the Court upheld the SEC's determination to afford no value to outstanding
stock option warrants, despite the fact that the warrants had no time limit for their
exercise and were trading for a positive value in the marketplace. The Court deferred
to the SEC's determination that "there is no ground for a reasonable expectation that,
within the foreseeable future" the warrants would be in the money. Id. at 344. "Where
the line is to be drawn is a matter for the expert judgment of the Commission." Id.
The Court's opinion drew a dissent from the odd couple of Frankfurter and Black, but
Frankfurter rested his objection on the reasoning of the court below. Id. at 348
(Frankfurter, J., dissenting).
299
Am. Power & Light Co. v. SEC (American Power II), 329 U.S. 90 (1946). The
case resolved the lingering constitutional issues left after North American at the end
of the Court's previous term. Under review was the SEC's order breaking up the largest single public utility holding company system registered under the Act.
300
Id. at 104.
908
Virginia Law Review
[Vol. 95:841
would determine the nation's "economic needs." 301 The Court happily ceded broad latitude to agency expertise, emphatically rejecting the challenge raised to the Commission's insistence on dissolution. "[T]he Commission here has accumulated experience and
knowledge which no court can hope to attain," 302 Murphy wrote.
The agency's judgment was accorded "greatest weight"; courts
would intervene only if the agency's action was unwarranted by
law or without justification in fact. 303
A third case reflecting similar divisions ended up with no published opinion after Frankfurter's change of heart erased a majority
for an opinion that Murphy had been preparing. 304 The SEC had
found Pacific Gas & Electric Company ("PG&E") to be a subsidiary of the North American Company ("North American"), thereby
subjecting PG&E to regulation as a subsidiary under PUHCA.
Murphy had no difficulty upholding the SEC's order: "The judicial
function on review ... ceases when it becomes clear that the inferences and conclusions drawn by the administrative agency have
01
The Court used equally broad strokes in addressing the utility's argument of an
unconstitutional delegation of legislative power to the SEC. "The judicial approval
accorded these 'broad' standards for administrative action is a reflection of the necessities of modern legislation dealing with complex economic and social problems." Id.
at 104-05.
302
Id. at 112.
303
Murphy's broad trust of the agency extended to the SEC's refusal to hold a hearing on the company's alternative plan proposed under§ ll(e) of the act, but here he
lost the Court's unanimity. Id. at 112, 118. Justice Rutledge wrote separately to say he
viewed the statue as requiring the Commission to provide for notice and hearing, the
absence of which would have been grounds for reversal had the companies not effectively waived their rights in this case. Id. at 121-22 (Rutledge, J., concurring). Frankfurter inserted a written statement as to his belief that the consideration of notice and
hearing does not arise given the particular circumstances of this case in what he hoped
would be a message to the agency. Id. at 121 (opinion of Frankfurter, J.). Frankfurter
noted his initial opposition to the discussion of the notice issue, and his willingness to
let it go so that the decision might be unanimous, but. with the filing of Rutledge's
separate opinion, he sought to pursue the issue: "[This] gives the SEC a hint to reconsider fully the proper construction of§ ll(e) and ... leave the matter for future disposition here by what one has a right to hope may be a full court." Letter from Justice
Felix Frankfurter to Justice Frank Murphy (Nov. 23, 1946) (on file with the Felix
Frankfurter Collection, Library of Congress, Reel 52).
JG< Pac. Gas & Elec. Co. v. SEC, 324 U.S. 826 (1945) (per curiam) (affirming judgment below by an equally divided Court).
'
2009]
Securities Law and the New Deal Justices
909
warrant in the record and a reasonable basis in law."305 North
American's ownership of seventeen percent of PG&E's voting securities and representation on PG&E's board were a sufficient basis for Murphy to conclude that North American controlled
PG&E, despite the lack of evidence of any influence by North
American over PG&E's policies. 306 Murphy's opinion, however,
failed to persuade Frankfurter, who switched his earlier vote to
uphold the SEC's action. He explained to Murphy:
After much travail I am constrained to conclude that the
S.E.C. made its decision in the case on unsustainable legal criteria. That they could have reached the same result exclusively on
their allowable interpretation of the facts, or that they may hereafter reach the same conclusion on such an appraisal of the facts,
can not from my point of view justify our approval of erroneous
criteria laid down by the Commission. You see you have educated me to keep these agencies within the legal bounds prescribed by Congress. This is for me fundamentally another Chen•
•
307
ery situation.
Once again, the SEC had not lived up to the exacting standards
that Frankfurter expected from the agency. 308
Murphy's trust of the experts was sufficiently great that he was
willing to construe standing narrowly in PUHCA reorganizations
because of a worry that minority shareholders might harass the
SEC. The Court majority, however, was not willing to go so far. In
American Power & Light Co. v. SEC (consolidated with SEC v.
305
Draft Opinion of Justice Murphy, Pac. Gas and Elec. v. SEC, No. 55, Oct. Term,
1944, at 6 (on file with the Felix Frankfurter Collection, Library of Congress, Reel
52)o0
Id. at 6-11.
307
Letter from Justice Felix Frankfurter to Justice Frank Murphy (Feb. 22, 1945) (on
file with the Felix Frankfurter Collection, Library of Congress, Reel 52).
·
308
Murphy was not happy with Frankfurter's switch, as it deprived him of his majority, and with Douglas recused as usual, the SEC's action would be upheld by an
equally divided court, rendering Murphy's "many long hours . . . spent on the
P.G.&E. opinion" a waste. Letter from Justice Frank Murphy to Justice Felix Frankfurter (Feb. 23, 1945) (on file with the Felix Frankfurter Collection, Library of Congress, Reel 52). Murphy was prepared to write that off, but he was more impatient
with Frankfurter's explanation (or lack thereof) for his switch: "I am ... at a loss to
know what it is that has made you change your mind. If, as you say, it is the erroneous
criteria used by the SEC, I ask you to reread my opinion and tell me what you think is
wrong." Id.
910
Virginia Law Review
[Vol. 95:841
Okin), 309 Justice Roberts, writing for the Court, held that Section
24(a)3 10 conferred standing on: (1) American Power & Light, as the
sole stockholder of Florida Power & Light Company, to challenge
an order by the SEC "requir[ing] Florida to make certain accounting entries which will result in taking out of surplus moneys which
would otherwise be available to pay dividends to [American
Power]," 311 and (2) Samuel Okin, a small shareholder in Electric
Bond & Share Company, who sought to challenge a loan from
Electric Bond & Share to its subsidiary, American and Foreign
Power Company. 312 The Court announced a broad standard for
those seeking review that ignored formal distinctions between direct and derivative claims: "a stockholder having a substantial financial or economic interest from that of the corporation which is
directly and adversely affected by an order of the Commission, irrespective of any effect the order may have on the corporation, is a
'person aggrieved' within the meaning of§ 24(a)." 313 Murphy, anxious to avoid interference with the administrative process, dissented, arguing that if American's "remote economic interest" was
sufficient to confer standing, "there is no limit to which minority
stockholders may harass the Commission and their respective corporations by challenging orders of the Commission directed to the
•
,,314
corporations.
309
Am. Power & Light Co. v. SEC (American Power !), 325 U.S. 385, 386 & n.1
(1945).
310
15 U.S.C. § 79x(a) (1940).
311
American Power I, 325 U.S. at 386-88.
312
Id. at 392 (noting that Okin challenged the loan as illegal and fraudulent, notwithstanding its approval by the SEC).
313
Id. at 388.
314
Id. at 396 (Murphy, J., dissenting). Murphy's concern about the efficiency of the
administrative process here is a little difficult to square with his position in In re Electric Power & Light Corp., in which he joined Frankfurter in dissenting from the denial
of stay of execution of a plan of dissolution pending appeal. 337 U.S. 903, 904 (1949)
(per curiam) (Frankfurter & Murphy, JJ., dissenting).
Murphy was also skeptical of Okin's claim of fraud. "Such frivolous claims of fraud
are insufficient to warrant making an exception to the general rule that a stockholder
cannot appeal an administrative order which involves only the corporation as such."
American Power I, 325 U.S. at 398 (Murphy, J., dissenting).
Murphy was joined by Black and Reed in arguing to deny standing to American
Power, a holding company, but not in reaching the same conclusion with respect to
Okin, a small investor. Black, ever the champion of the underdog, expressed concern
"that courts should not put insuperable obstacles in the way of stockholders whose
interests might be sacrificed by management." Letter from Justice Hugo Black to Jus-
2009]
Securities Law and the New Deal Justices
911
Although the Court read Section 24(a) broadly in American
Power, it subsequently gave the SEC some control over where a
challenge could be brought. In General Protective Committee for
Holders of Option Warrants of United Corp. v. SEC, 315 the Court
held that the district court, rather than the court of appeals, had jurisdiction over elements of the plan of reorganization that the SEC
made subject to approval by the district court in an enforcement
proceeding. The case was unanimous, notable only in that it was
Douglas's first opinion in a PUHCA case, almost fifteen years after
he left the SEC. 316
Douglas again wrote for the Court a year later when the Court
upheld the reservation of jurisdiction of the SEC to pass on the
reasonableness and allocation of fees and expenses paid to underwriters in connection with the reorganization of Electric Bond &
Share. 311 Douglas surely drew from experience when he wrote:
Payment of excessive fees was one of the historic abuses of the
reorganization procedure whereby utility companies were
milked, an abuse the Public Utility Holding Company Act sought
to correct. ...
. . . Congress had before it the detailed record of holding company activities and knew that many of them had a proclivity for
predatory practices. The fees were not only large; they were often loaded on affiliated companies and concealed in intrasystem
accounts. 318
SEC oversight was essential to eliminate those abuses, in Douglas's
view. Douglas had now-belatedly-placed himself with the
Court's majority in giving the SEC free rein.
tice Frank Murphy (May 30, 1945) (on file with the Frank Murphy Collection, Bentley
Library, University of Michigan).
315
346 U.S. 521 (1954).
316
The Court was more generous to the SEC's interest in finality in SEC v. Louisiana Public Service Comm'n, 353 U.S. 368, 372 (1957) (per curiam), in which it held
that a decision by the SEC not to reopen a prior proceeding was not subject to review
in the court of appeals. The decision attracted little interest from the Justices; it was
decided in a short per curiam by Whitaker. See Letter from Chief Justice Earl Warren
to Justice Charles Evans Whitaker (May 9, 1957) (on file with the Earl Warren Papers, Library of Congress, Box 633).
317
SEC v. Drexel & Co., 348 U.S. 341 (1955).
318
Id. at 348-49 (footnote omitted).
912
Virginia Law Review
[Vol. 95:841
Frankfurter again found himself in dissent, this time joined by
Burton. 319 Frankfurter was fighting a lonely fight to keep the SEC
to what he saw as the letter of the law that he had helped to enact.
A majority of the Court was consistently willing to afford the
agency latitude to fight the abuses that had led to the adoption of
the federal securities laws.
IV. A RELIABLE COURT
From a twenty-first century perspective, perhaps the most striking feature of the New Deal Court's work in the field of securities
law is how reliable the Court was in accomplishing Roosevelt's
agenda-there were no surprises for the President. The intervening
decades have seen a number of appointments that have caused
Presidents to regret their choices. Roosevelt's nominees gave him
no cause for similar regret, at least in the field of securities law, a
legislative priority for the Roosevelt administration. The New Deal
Court delivered in validating political control over finance.
Why was there such a consistent pattern of deference to the
SEC? No individual Justice was leading the fight for the SEC. The
two Justices who might have led the Court based on their deep experience in the area, Frankfurter and Douglas, exercised very little
influence. Murphy, largely by default, ended up with a recurring
role. Given his lack of experience in the area and the low regard
that his brethren had for his abilities, it is difficult to say that he
dramatically shaped the jurisprudence or led the Court in this area.
Rather, his opinions reflect a broad consensus-based on similar
experiences that the New Deal Justices brought to the Court-that
judges should defer to the SEC.
319
Frankfurter wrote:
Congress effectively equipped the Commission with power to regulate fees in
the various proceedings which required approval by the Commission. But Congress particularized. It did not vest this fee-fixing authority of the Commission
in a comprehensive provision. It dealt with the problem distributively. It was
explicit in relating the power to fix fees to the particular proceeding.
The [Public Utility] Holding Company Act of 1935 is a reticulated statute, not
a hodge-podge. To observe its explicit provisions is to respect the purpose of
Congress and the care with which it was formulated.
Id. at 349-50 (Frankfurter, J., dissenting).
2009]
Securities Law and the New Deal Justices
913
A. Reliability
Over the last half century, Presidents regularly have set out to
mold the Supreme Court to implement the administration's goals,
with varying degrees of success. For Franklin Roosevelt, the challenge was more salient than for his successors because he initially
faced a Court that was perceived to be hostile to the New Deal
agenda. The eight men Roosevelt named to the Court each accepted Roosevelt's new role for government in the nation's economy. Stone's elevation to Chief Justice was no exception to this
pattern; although a Republican holdover, he shared his new colleagues' belief in judicial deference to political control over finance. Collectively, Roosevelt's appointments produced a Court
that quickly abandoned the old Court's inclination to strike down
New Deal initiatives. The Court boldly announced its willingness
to give Congress and the administration a wide berth in economic
regulation. That well known and lasting legacy of deference has
continued to this day.
Less well known is the New Deal Court's deference to the SEC
as it asserted governmental control over finance, displacing broad
areas of private ordering that had previously dominated the field.
After the Jones case in 1936, it was almost four decades before the
Supreme Court made any concerted effort to rein in the SEC and
the reach of the securities laws. Frankfurter found no consistent
support in his effort to bring judicial scrutiny to bear on the agency.
The forty years after Jones saw a string of three dozen outcomes
supportive of the agency and an expansive view of securities laws,
interrupted only sporadically by a restrictive decision. 320
In retrospect, Roosevelt's triumph with the New Deal Court in
the field of securities law is all the more impressive in light of the
subsequent political repudiation of his administration's two most
expansive governmental intrusions into business. PUHCA and the
Chandler Act are all but invisible to modem securities lawyers.
PUHCA, which allowed the SEC to dictate corporate governance
standards to an industry vital to the economy, faded in importance
as all of the nation's public utility holding companies were broken
up by the 1950s. A generation later, narrow interpretations and
regulatory exemptions undid much of the work accomplished by
320
Sullivan & Thompson, supra note 12, at 1580.
914
Virginia Law Review
[Vol. 95:841
the SEC in breaking up the holding companies. New utility conglomerates emerged, such as Enron, with diverse business interests
and sprawling operations. PUHCA's purpose-the Brandeisian assault on "bigness"-was largely repudiated, and the Act itself was
repealed in 2005. 321 The Chandler Act, which afforded the SEC a
key role in reorganization plans, was replaced by the 1978 Bankruptcy Reform Act, which did not provide any role for the SEC. 322
The SEC supported the move. As a result of the repeal of these
two laws, the SEC was deprived of the two roles that gave it an important say in corporate governance, leaving the agency with the
disclosure-focused regulation of the 1933 and 1934 Acts. The Sarbanes-Oxley Act has recently increased the role of the securities
laws in corporate governance, but its incremental reforms hardly
portend a move toward federal incorporation like PUHCA and the
Chandler Act.
Why did Roosevelt have such success with his appointees? They
shared several key characteristics. First, most had had prior advocacy positions in the executive branch, which proved to be a reliable barometer of a Justice's future leanings. Douglas headed the
SEC, Murphy served as Attorney General, Jackson as both Solicitor General and Attorney General, among other high level positions, and Reed as general counsel to the Reconstruction Finance
Corporation and then Solicitor General. All enthusiastically endorsed FDR's new role for government in managing the economy
ravaged by the Great Depression. Black's record in the Senate (including his bitter attack on the utility industry) provided a reliable
predictor of his future judicial attitudes. 323 Frankfurter was the most
skeptical of the Justices toward the SEC, but he never showed anything like the hostility of the Old Guard in Jones. He had served
briefly in government before undertaking an academic career, and
his steady informal roles produced at least some bonding effect
similar to that produced by more formal service in the executive
branch. 324 Only Rutledge came from the appellate court, the typical
321
See supra note 8.
The story of this evolution and William 0. Douglas's unintentional contribution
to it is well told by Skeel, supra note 117, at 125-28.
323
Bymes's Senate service would likely have served as an equally accurate predictor
of his judicial judgments, had he stayed long enough on the Court to render any.
324
Notably, Frankfurter disclaimed the title of New Deal Justice:
322
2009]
Securities Law and the New Deal Justices
915
path for modern Justices, after serving as a professor. In short,
Roosevelt's appointees overwhelmingly bought into the New Deal
agenda.
Second, Roosevelt clearly had a "litmus test": he picked nominees who had already proved their loyalty on the Court-packing
plan, the fulcrum of the dispute between the administration and
the "old" Court. Reed helped draft the bill;325 Jackson was a key
administration witness in the Congressional hearings;326 Black was a
principal lieutenant to the Senate's majority leader Robinson in
this debate;327 Byrnes, also a Senator, likewise supported the plan;328
Douglas quickly enlisted in the administration's efforts to push the
plan. 329 Frankfurter was silent in the face of overwhelming pressure
to speak against the plan, including from his own wife. His silence
may have ensured his appointment. 330 A willingness to stomach the
deeply controversial Court-packing plan demonstrated a real
commitment to constraining judicial power.
Third, Roosevelt knew his nominees personally. They were
trusted advisors, both in the strategy for defending the New Deal
against judicial attack,331 and on the question of whom to add to the
Court. By and large they were a mutual admiration society before
their appointment to the Court. Frankfurter and Douglas, who
would become bitter enemies on the Court, each pushed for the
I'm incurably academic and cannot rid myself of the conviction that it is of the
very essence of the function of this Court that when a man comes on it, he
leaves all party feelings as well as affiliations behind. I certainly do not and have
not since January 30, 1939 for one split second felt like or deemed myself, or
deemed it right for anyone else to think of me, as a "New Deal" Justice.
Copy of Handwritten Note from Justice Felix Frankfurter to Justice Owen Roberts
(Feb. 4, 1943) (on file with the Felix Frankfurter Collection, Harvard Law School Library, Part 3, Reel 3).
325
Lash, supra note 29, at 53; Fassett, supra note 140, at 174 (describing Reed's public support).
326
Cushman, Rethinking the New Deal Court, supra note 188, at 18.
327
Ferren, supra note 91, at 133-35 (describing a prominent radio address given by
Black).
328
Fassett, supra note 140, at 303 (describing support of Byrnes); Leuchtenburg, supra note 144, at 135 (describing support of future Justices Byrnes, Black and Minton
as senators).
329
Seligman, supra note l, at 155.
330
Lash, supra note 29, at 63 ("It is doubtful ... that Roosevelt would have appointed [Frankfurter] after Cardozo's unexpected death, had he not loyally kept his
silence [in the court packing fight].").
331
See supra Part II.
916
Virginia Law Review
[Vol. 95:841
appointment of the other to the Court.332 Jackson pushed for
Frankfurter's nomination to the Court;333 Jackson and Murphy
pushed for Douglas;334 Murphy, Black, and Douglas pushed for
Rutledge, 335 although Frankfurter lobbied for Learned Hand;336
Frankfurter had urged the appointment of Reed as Solicitor General.337 And they did not stop advising the President when they
were appointed to the Court. Frankfurter, Douglas, Murphy, and
Jackson continued to advise the President,338 and Douglas and
Jackson were known to play poker in the President's game.339
Fourth, this was not just a politically astute, but a politically ambitious, court. The New Deal Supreme Court was like today's U.S.
Senate: each member believed himself a viable national electoral
candidate. 340 Douglas was active in plotting strategy to seek the vice
presidency in 1944 and in 1948;341 Black believed his prior Klan association knocked him out of the Vice Presidency in 1944;342 Mur-
332
After his appointment, Douglas wrote in his diary:
I saw Brandeis at his apartment and he told me something which gave me as
great a thrill as the nomination itself. He said "You were my personal choice for
my successor." He was most gracious and held my hand with great warmth as
he said it. I was deeply touched. That, I felt, was the greatest compliment ever
paid me. Whether he had communicated that thought to the President, I do not
know. I suspect he had done so, indirectly through Felix who was most anxious
that I receive the nomination.
William 0. Douglas, Diary (Mar. 26, 1939) (on file with the William 0. Douglas Collection, Library of Congress, Box 1780).
333
Robert H. Jackson, Diary (Jan. 2, 1939) (on file with the Robert H. Jackson Collection, Library of Congress, Box 81); Ferren, supra note 91, at 137.
334
Ferren, supra note 91, at 151 (describing Jackson's support); J. Woodford Howard, Jr., Mr. Justice Murphy: A Political Biography 192 (1968) (describing Murphy's
sugRort).
3
Fine, supra note 226, at 194.
336
Ferren, supra note 91, at 216-17.
337
Irons, supra note 16, at 12. Frankfurter earlier had asked Reed to find spots for
Cohen and Corcoran at the Reconstruction Finance Corporation. See Fassett, supra
note 140, at 54.
338
Lash, supra note 29, at 77.
339
Murphy, supra note 127, at 185.
340
New Deal appointees joined a court that already was more politically deep than
most. Roberts was rumored as a Republican presidential candidate in 1936 and
Hughes had resigned from the Court to run for President back in 1916. Leuchtenburg,
suEra note 144, at 43.
'Murphy, supra note 127, at 217-30 (discussing 1944); id. at 251-65 (discussing
1948).
342
Leuchtenburg, supra note 144, at 207-08.
Securities Law and the New Deal Justices
2009]
917
phy, the former Governor of Michigan, retained presidential ambitions after moving to Washington.343 Contradicting the Roosevelt
administration on a key aspect of the New Deal agenda would not
have played well with the party faithful. Only Frankfurter was immune to the siren song of political ambition; his Austrian birth
meant he could never attain the top rung of political life.
This combination of executive branch experience, trial by fire
during the Court-packing battle, political advising, and political
ambition produced Justices who were of one mind with the President on the central question of government control over the economy. Roosevelt's appointments ensured that the Supreme Court
would not be an obstacle to government control over finance.
B. The Ephemeral Leaders as to Securities Law
The New Deal Court established a pattern of deference to the
SEC in securities cases despite the absence of a strong leader on
the Court. The two most obvious candidates for that role were
Douglas and Frankfurter, professors from Yale and Harvard respectively. Both had already developed fairly complete views of
administrative and commercial law prior to their judicial appointments. Frankfurter was a leading theorist of the administrative
state and Douglas was a rising star in bankruptcy and securities
law. Their pre-Court correspondence reflects mutual admiration,
suggesting they might have formed a powerful coalition in securities law. The reality was far different, however, with neither Justice
playing an important role.
1. Douglas
Douglas's is the murkier of the two cases. His academic interests
were much more focused than Frankfurter's and he had active administrative experience with the SEC. The latter provides the most
ready explanation for his lack of influence: his consistent recusals
in securities cases. Having been chair of the SEC when the agency
launched its enforcement of PUHCA, he did not sit on a PUHCA
case for his first dozen years on the court, as the breakup of the
utility holding companies dragged on and on. By the time he par343
Fine, supra note 226, at 133.
918
Virginia Law Review
[Vol. 95:841
ticipated, the great battles of that front had been fought and won.
Douglas did not write a PUHCA opinion until 1954, the tail end of
the Court's PUHCA jurisprudence. He also recused himself from
all securities cases for his first six years on the Court. In the first securities case decided during his tenure, U.S. Realty, Douglas
recused himself despite having no basis for disqualification, simply
because of pressure from Chief Justice Hughes, who was wielding
recusal as a strategic weapon. For other cases, the contact that
could have created conflicts was very tangential. The notes in his
files indicate that his secretary, Edith Waters, collected the information on the ties of the case to the time that Douglas was at the
Commission. In one case, the investigation had not started until
three years after Douglas left the Commission, but the mere mention of a possible earlier investigation at the staff level was sufficient to trigger recusal even though it had never reached the commissioners.344 In the Joiner case heard in 1943, the case had only
been opened quite recently, but mention of an earlier informal
staff investigation that was closed in February 1936 (Douglas had
become a commissioner on January 23) was enough to provoke
recusal. 345
Douglas left little guidance on his recusal policy, other than to
say it was up to each Justice. 346 Perhaps Douglas's political ambition
made him acutely sensitive to any potential charge of conflict of interest. Rutledge worried that Douglas's recusals were depriving the
court of expertise. 347 Yet, his nonparticipation in securities cases
does not appear to have affected their outcomes; the available evidence suggests that Douglas would have joined in the broad deference given to the SEC. Even after he ceased recusing himself,
Douglas was not an active participant in securities cases, not writ344
Memorandum from Edith Walters (e.w.) for the A.C. Frost & Co. v. Coeur
d'Alene's Mines Corp. conference (Dec. 21, 1940) (on file with the William 0. Douglas Papers, Library of Congress) (noting no official action by the SEC until April
1940, which was after Douglas had left the agency). The memo notes that the regional
office looked into some shareholder complaints between May and August 1937 and
that the agency's general counsel decided it was not a matter for action by the Commission and was never taken to a Commission meeting.
~ Memorandum from Edith Walters (e.w.) for the SEC v. CM. Joiner & Co. conference (Oct. 15, 1943) (on file with the William 0. Douglas Papers, Library of Congress) (reporting information gathered from Orval duBois).
346
William 0. Douglas, The Court Years: 1939-1975, at 31 (1980).
347
Ferren, supra note 91, at 282.
34
2009]
Securities Law and the New Deal Justices
919
ing an opinion until Penfield in 1947. Indeed, most of his securities
opinions show up in the last four years of his tenure, most notably
his short but wide-ranging opinion for the Court in Bankers Life,
the apogee of the reach of Rule lOb-5 as a regulator of securities
transactions. 348 Bankers Life is remarkable for its opacity; even less
significant are a string of dissents Douglas wrote in the 1970s after
the Court's majority had taken a more restrictive turn in securities
law. The bottom line is that Douglas had little impact on the
Court's securities jurisprudence for his entire career.
His abandonment of securities is all the more peculiar in light of
his very active role in other areas of private law, where he played
the leadership role that one would have been expected given his
background and talent. In bankruptcy, for example, he was a
leader on the Court from his first term. He was instrumental in getting Los Angeles Lumber349 heard by the Court:
The CJ has a "special list" for certioraris. Those which he thinks
are not even worthy of discussion in conference are placed by
him on the "special list." He circulates the "special list" a day or
so before conference. Case v. Los Angeles Lumber Products Co.
was on his "special list." I wrote him that I wanted it discussed.
So he discussed it and firmly recommended that the petition be
denied. Before conference I had planted some seeds of doubt in
the minds of the Brethern [sic]. As a result we got 4 votes necessary for a grant. The CJ. seemed quite upset. I later learned that
this was the first time in the C.J.'s regime when a case had been
removed from his "special list.'' 350
Not only did Douglas succeed in getting the case heard over
Hughes' opposition, he prevailed in conference as well. 351 Douglas
congratulated himself in his diary when the decision came down:
"The ipinion [sic] should have a healthy effect and curb the reor348
Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971).
Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 113-14 (1939) (interpreting "fair and equitable" in the bankruptcy act).
350
William 0. Douglas, Diary (Oct. 18, 1939) (on file with the William 0. Douglas
Collection, Library of Congress, Box 1780).
351
William 0. Douglas, Diary (Oct. 21, 1939) (on file with the William 0. Douglas
Collection, Library of Congress, Box 1780) ("The CJ was bent on affirming the judgment below in Case v. Los Angeles Lumber Products Co. He had McR and Reed with
him. Stone assigned the opinion to me.").
349
920
Virginia Law Review
[Vol. 95:841
ganization racketeers-the holding companies and the investment
bankers who want to keep their preserves inviolate and under their
control."352 Douglas again pushed bankruptcy onto the Court's
agenda later that term in Pepper v. Litton,353 getting that case removed from the Chief Justice's "special list." 354
Douglas's lack of influence in securities cases may also reflect
more general personality characteristics and his inability to get
along well with colleagues. Cavalier work habits, colleagues' resentment of his political ambitions, and even the fallout from his
divorce seemed to isolate him from his colleagues, despite early
shared experiences. 355 Alternatively, the pattern of nonparticipation
suggests that Douglas was finished with securities law. 356 His autobiography does not mention even a single securities case for his entire time on the court. 357 Perhaps the field had done all it could for
him in terms of getting him to the SEC, and from there to the
Court. Perhaps the large issues of the role of the government in the
economy had been resolved and he now wanted to make his mark
on the public stage in areas like civil liberties. Douglas's remaining
ambitions in corporate law-federal incorporation and socialized
investment banking-could be achieved only through legislative,
not judicial, action.
352
William 0. Douglas, Diary (Nov. 4, 1939) (on file with the William O. Douglas
Collection, Library of Congress, Box 1780).
353
308 U.S. 295 (1939).
354
William 0. Douglas, Diary (Nov. 9, 1939) (on file with the William O. Douglas
Collection, Library of Congress, Box 1780) ("This case had been on the C.J.'s 'special
list.' I was responsible for taking it off. He was against it since it involved only a factual question, not an 'important principle.' I thought otherwise and carried the
Court.").
355
See, e.g., James F. Simon, Independent Journey: The Life of William 0. Douglas
201-02 {1980) {describing a small group that gathered to celebrate Frankfurter's appointment to the court that included Douglas, Jackson, Murphy, and Harry Hopkins
in Harold Ickes' office at the Department of the Interior).
356
See Murphy, supra note 127, at 351. Walter Dellinger, then a clerk to Black (and
later Acting Solicitor General in the Clinton administration), asked Douglas in 1968 if
he would go on the Court if he had to do it over again. Douglas replied, "Absolutely
not!" He explained that "the Court as an institution is too peripheral, too much in the
backwater on the Court. You 're just too far out of the action here." Id.
357
See Douglas, supra note 346, at 417-21 ("Index of Supreme Court Cases in This
Volume.").
2009]
Securities Law and the New Deal Justices
921
2. Frankfurter
If Douglas was not going to assume a leadership role in the field
of securities laws, why did Frankfurter not take the lead? Frankfurter was not inclined to defer to the expertise of the SEC, given
his role in the enactment of the agency's key statutes. Frankfurter
certainly expected to be a leader on the New Deal Court and outside observers expected it as well.358 Moreover, Frankfurter
"yearn[ed] for disciples," 359 and he was unceasing in his efforts to
bring his colleagues into line with his own well-developed views of
the law. 360 This may, however, be the key to Frankfurter's lack of
influence: his efforts to persuade tended to alienate. 361
Frankfurter had two weaknesses in this regard. The first was his
tendency to view those who disagreed with him as wanting either in
intelligence or morals. Frankfurter and Reed were close allies from
Reed's time as Solicitor General,362 but that relationship frayed
when they became colleagues on the Court. Reed told his clerks:
"the trouble with Felix is that he never considers that he might be
358
Hirsch, supra note 17, at 141 ("It was inevitable that Frankfurter in 1939 would
think of himself as the intellectual leader of the Roosevelt Court. Members of the
White House circle expected him to dominate; that was why he had been appointed.
He expected himself to dominate."); Lash, supra note 29, at 64 ('"If you appoint
Felix,' Ickes said to Roosevelt, 'his ability and learning are such that he will dominate
the Supreme Court for fifteen or twenty years to come. The result will be that probabl~ after you are dead, it will still be your Supreme Court.").
59
Lash, supra note 29, at 75 ("Frankfurter had come on the Court expecting that in
time he would become its intellectual leader and that the authority he exercised in his
seminar at Harvard would be replicated in the conferences of the Brethren. He had a
yearning for disciples.").
360
Hirsch, supra note 17, at 209 ("Although he, perhaps more than anyone, lobbied
other members of the Court for votes, he never admitted doing so, but rather perceived his own actions as helpfully 'advising' his brethren; his judicial opponents,
however, were, in his view, cynical and evil spreaders of their own influence.").
361
See Eugene Gressman, Psycho-Enigmatizing Felix Frankfurter, 80 Mich. L. Rev.
731, 739 (1982) (reviewing Hirsch, supra note 17) ("Neither I nor Murphy could discover what Frankfurter hoped to accomplish with this endless chain of condescending
admonishments .... If the notes were really designed to reform or change Murphy's
ideological commitments, they were futile. If they were designed to change a Murphy
vote or position in a given case, they utterly failed. But if they were written to annoy,
insult, or display Frankfurter's 'personalia' techniques, perhaps they hit their mark.").
362
See Schlesinger, supra note 99, at 228-29 ("Stanley Reed became the particular
protector of the Harvard Law School crowd. RFC and, after Reed became Solicitor
General in 1935, Justice served as the intelligence switchboard and the operational
base for the web of Frankfurter-Corcoran relationships through the new agencies.").
922
Virginia Law Review
[Vol. 95:841
wrong: if you don't agree with Felix, you must be either stupid or
dishonest!" 363 Moreover, Frankfurter's self-righteous streak could
lead him to be abusive toward his colleagues. According to Douglas,
Frankfurter also indulged in histrionics in Conference. He often
came in with piles of books, and on his turn to talk, would pound
the table, read from the books, throw them around and create a
great disturbance. His purpose was never aimless. His act was designed to get a particular Justice's vote or at least create doubts
in the mind of a Justice who was thinking the other way. At
times, when another was talking, he would break in, make a derisive comment and shout down the speaker. 364
Douglas was hardly an impartial observer, given the deep-seated
antipathy that developed between the two, but his views were
shared by other colleagues as well. 365
Frankfurter was also hampered in his efforts to persuade by his
low opinion of a number of his colleagues, which he had difficulty
hiding. Chief Justice Vinson is one example. Edward Prichard, a
Vinson protege who served as Frankfurter's law clerk, said that
Frankfurter "did not have high regard for Vinson's judicial capabilities and ... was not very adept at concealing his views on things
of that sort." 366 Vinson, ordinarily an easy-going personality,367 once
had to be blocked from striking Frankfurter in conference. 368
Frankfurter's contempt for what he perceived as Black and Douglas's political maneuvering is well known. Other Justices also felt
363
Quoted in Fassett, supra note 140, at 584. See also Hirsch, supra note 17, at 190
("Frankfurter measured every colleague by his alignment with what he regarded as
the ultimate split within the Court-between his 'disinterested' and scholarly belief in
judicial self-restraint, and the 'shoddy,' 'result-oriented,' 'demogogic' jurisprudence of
his opponents.").
364
Douglas, supra note 346, at 22.
365
Howard, Jr., supra note 334, at 269 ("Justice Murphy in turn came to regard Justice Frankfurter's professorial habits as tiresome and tangential. The former law professor's campaigns for 'self-restraint' and 'law as the embodiment of reason,' he found
hard not to dismiss as masks for the same use of personal convictions that Frankfurter
so readily condemned in others.").
366
St. Clair & Gugin, supra note 273, at 174.
367
Id. ("Although Vinson was an affable man by nature, 'he could take offense if he
were affronted and Frankfurter was a good affronter."').
368
Murphy, supra note 127, at 301.
2009]
Securities Law and the New Deal Justices
923
the sting of Frankfurter's contempt. 369 Within a few years of his appointment to the Court, Frankfurter's heavy-handed manner had
left him with close connections to only Jackson and Roberts.
The result of Frankfurter's alienation of his colleagues was that
his message did not find a very receptive audience. He presented
his colleagues with a stark choice-defer to the SEC or defer to
him. For Frankfurter's New Deal colleagues, it was easier to love
the SEC. As a result, Frankfurter's core message-the importance
of adherence to the rule of law by the administrative state-did not
draw any consistent followers. Frankfurter ended up dissenting ten
times in securities cases during this period, more than any other
Justice. Perhaps even more telling, however, is the fact that his
small dissenting bloc was continually shifting, suggesting that
Frankfurter was not delivering a consistent message.
3. Into the Void
In the absence of Douglas or Frankfurter, there was a wide dispersal of influences over the Court's securities docket. In PUHCA
cases, with Douglas, Reed, Jackson, and sometimes Stone recused,
the decision-writing fell to Murphy, or more accurately, to his
clerk. Murphy did not have any particular interest in the area; he
wrote a substantial number of opinions in the area simply because
that was what he was assigned. 370 Murphy's prior exposure to public
utilities was quite limited. 371 Murphy's lack of experience was in
369
Ferren, supra note 91, at 277 (describing how Frankfurter harangued Reed to his
face and made fun of him behind his back, calling him a "vegetable"); Howard, Jr.,
supra note 334, at 268 ("Justice Murphy enjoyed Frankfurter's wit and acknowledged
his superior intellect. Yet he felt defensive beside them .... Frankfurter was an excitable and scrappy intellectual who had ill-concealed contempt for the Irishman's intellect and night life .... "); Fine, supra note 226, at 195 (Frankfurter had similarly low
regard for Burton); Hirsch, supra note 17, at 182 (noting that Frankfurter wrote to
Hand that "'Hugo is a self-righteous, self-deluded part fanatic, part demagogue, who
really disbelieves in law, thinks it is essentially manipulation of language. Intrinsically,
the best brain in the Jot, but undisciplined and 'functional' in its employment, an instrument for supporting a predetermined result, not a means for responsible inquiry").
370
Telephone Interview with Eugene Gressman, supra note 274.
371
Murphy's pre-Court experience with public utilities was limited and unlikely to
make him sympathetic to the industry. He had a run in with the utility companies
while governor of Michigan. The private utility companies were engaged in "spite line
construction," the practice of building power lines in areas that had been approved
for rural electric cooperatives in an effort to maintain their monopolies. Sidney Fine,
924
Virginia Law Review
[Vol. 95:841
sharp contrast to the rest of the Court, which included a professor
who had brokered the key legislative compromise for the Act
(Frankfurter) and a Senator who had chaired key legislative hearings (Black). Also on the Court, although recusing themselves in
many of the PUHCA cases, were the SEC Chairman at the time
the enforcement program was begun (Douglas), the Solicitor General who argued the first case (Reed), and the Assistant Attorney
General who argued the second case before the Supreme Court
(Jackson). 372 The fact that Murphy wrote most frequently for the
Court in this area might suggest that the Justices viewed the area as
unimportant; Murphy's abilities were not well respected by his colleagues.373
The dearth of interest in securities law also may have reflected a
dearth of legislative and regulatory initiatives. Congress passed no
significant securities legislation between 1940 and 1964. The SEC
went from being an activist force under Douglas to being a backwater after its wartime move to Philadelphia. (It was not returned
from exile until 1948.) Private class actions, the development that
fueled the Court's reactionary backlash of the 1970s in securities
law, did not become a force until Federal Rule of Civil Procedure
23 was amended in 1966. Simply put, there was not much going on
in securities law after the constitutionality of PUHCA was affirmed
in North American. Douglas had made his national name as SEC
Frank Murphy: The New Deal Years 445 (1979). In response, Murphy's administration prohibited the construction of new lines by the companies without prior approval. Id.
m Even the Justices who had not played a role in the enactment and defense of
PUHCA had some experience with corporations and utilities in their background.
Rutledge was a professor of corporate law at Washington University and Iowa. See
supra note 91 and accompanying text. Harold Burton, Truman's first appointee to the
Court, also had extensive experience in corporate and public utilities law. He worked
for a corporate law firm in Cleveland and served as general counsel of the Utah
Power and Light Company and the Idaho Power Company. Mary Frances Berry, Stability, Security, and Continuity: Mr. Justice Burton and Decision-Making in the Supreme Court 1945-1958, at 4 (1978). He also "taught a corporation law course at the
Western Reserve University Law School from 1923 through 1925." Id. at 5. When he
returned to private practice in 1932, he "specialized in municipal law, sometimes representing communities on utility and bond issues, and was associate counsel for the
cit~ of Cleveland in its gas rate litigation." Id. at 6.
33
Howard, Jr., supra note 334, at 411 ("Nearly all of [Murphy's] colleagues, at one
time or another, had to remind him that the Court's job was not to pronounce on the
reasons for policy, but merely to review power to make it.").
2009]
Securities Law and the New Deal Justices
925
Chairman a decade earlier, and Frankfurter had cemented his future nomination to the Court by acting as Roosevelt's advisor in
enacting the securities laws, but it was not an area to establish a
reputation as a Justice.
CONCLUSION
A lynchpin of Franklin Roosevelt's political revolution was governmental control over finance, reflecting a nascent trust in administrative experts to make the crucial decisions organizing economic
behavior. Securities regulation was at the heart of this change in
the role of government in the 1930s. Success for this administration
required not just enactment of new laws by Congress, but also an
effective strategy to get these new laws past the Supreme Court.
Ultimately for FDR this meant appointing Justices who believed in
the new role of government in the economy. The eight men Roosevelt appointed to the Court did not disappoint. Other Presidents
have sought to make over the Supreme Court for particular political goals with variable success; Roosevelt unambiguously succeeded in achieving his goal, at least in the field of securities laws.
A likely explanation for this success was that all eight of the New
Deal Justices had front line experience in the earlier stages of the
enactment and defense of the New Deal securities laws. Indeed,
securities law formed something of a common link for the future
Roosevelt appointees. Such a bonding experience may better predict judicial outlook than opinions written as an appellate court
judge, more recently relied upon to handicap judicial appointments. The course for securities law set by these eight Justices continued almost unbroken for forty years.
The two Justices with the most direct securities experience, however, turned out to have played rather minor roles in the Court's
securities law jurisprudence. Felix Frankfurter oversaw the drafting
of the 1933 Act, brokered the key compromise for PUHCA and
advised the new administration on litigation strategy, but he
squandered any leadership role with an attitude toward colleagues
that made it difficult for anyone to follow. But as a dissenter,
Frankfurter did frame the point at which the New Deal alliance
frayed, arguing for judicial control of the SEC. That debate would
926
Virginia Law Review
[Vol. 95:841
reappear with the efforts of Lewis Powell to rein in the SEC's fight
against insider trading, 374 and it continues to this day. William 0.
Douglas drove the SEC expansion into bankruptcy reorganizations, brought the New York Stock Exchange to heel, and oversaw
the agency's aggressive role in public utility holding company legislation. Notwithstanding these achievements in the field, Douglas
seemingly lost all interest in securities law upon his appointment to
the Court.
The abdication of these leading figures, did not affect the ultimate outcomes, however, as Roosevelt's other appointees did not
require forceful leadership; they were already bonded to the cause
from their political (Black and Byrnes) and advocacy (Reed, Jackson, and Murphy) roles. As a Court, they were committed to governmental control over finance. The result was generous deference
to the SEC, a judicial attitude that would last until the 1970s.
374
Pritchard, supra note 238, at 15.